APY

APY, or annual percentage yield, is a measure of the real rate of return on an investment or deposit over a one-year period, taking into account the effect of compounding. It is commonly used to compare the potential earnings of savings accounts, certificates of deposit, and other interest-bearing products.

Calculation of APY depends on the nominal interest rate and the frequency of compounding. It can be expressed as APY = (1 + r/m)^m − 1, where r is the stated annual rate and m is the number of compounding periods per year. For example, a nominal rate of 5% with monthly compounding (m = 12) yields an APY of about 5.12%.

APY versus APR: APR is the annual percentage rate and does not account for intra-year compounding, while APY includes the effect of compounding. As a result, APY generally provides a more accurate measure of the actual year's return when interest is reinvested.

Applications and variability: In traditional banking, APY is used to communicate the expected return on savings and other deposits. In decentralized finance and other newer markets, APY is also used to advertise yields from staking, lending, or liquidity provision. Such yields can be variable and depend on platform risk, liquidity, and fees; the advertised APY may assume conditions that do not hold over time.

Limitations: APY is a projection based on current rates and compounding assumptions. It does not account for fees, taxes, withdrawal penalties, or changes in rates. Real returns can be higher or lower, so it should be used alongside other factors when comparing products.