What Is APY (Annual Percentage Yield)?

APY (Annual Percentage Yield) is the interest you earn over a year on a bank CD (Certificate of Deposit), including the effect of compounding, expressed as a percentage.

There are only 2 cases where the APY is higher than the interest rate of a CD.

1. Compounding Frequency < 1 Year: In this case, interests paid within the year are reinvested to generate additional interests at the end of the investment year.

For example, if you invest $1000.00 on a 1-year CD with a 5.00% interest rate compounding monthly, you will earn an interest of $4.17 at the end of the first investment month. Your deposit becomes $1004.17 and continues to earn interest for the next 11 investment months. At the end of investment year, you will earn an interest of $51.16, which represents an APY of 5.116%.

2. Deposit Term < 1 Year: In this case, since you receive interest and deposit back less than a year, you could compound them together and reinvest it to generate additional interests at the end of the investment year.

For example, if you invest $1000.00 on a 1-month CD with a 5.00% interest rate compounding annually, you will earn an interest of $4.17 at the end of the investment term. Your deposit becomes $1004.17. You could then reinvest the same 1-month CD 11 times. At the end of investment year, you will earn $51.16, which represents an APY of 5.116%.

⇒ APY Calculation Formula for Bank CDs

⇐ Differences between Bank CD and Brokered CD

⇑ Introduction on CD (Certificate of Deposit)

⇑⇑ Fixed Income Investments