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The Curious Bag
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APY, also known as annual percentage yield, refers to savings and CD accounts and, more important, how much interest you will earn on those accounts.
Interest Rate
The rate specifies the amount of interest your account will earn.
What is APY?
The APY is what an account actually pays you in one year after all the interest is added to your original deposit. The interest is compounded, so it builds throughout the year.
How Compounding Works
Compounding is the mathematical formula the bank uses to figure your yield, based on the rate. This basically means interest added to more interest. Bank accounts that offer daily compounding earn more than those that compound monthly or quarterly.
Truth in Savings
Federal law requires that banks follow the Truth in Savings Act of 1991, which requires banks to disclose the APY on their accounts. Banks must define APY as a percentage rate expressing the total amount of interest that would be received on a $100 deposit. This makes it easier to understand which accounts offer the best deals.
Consideration
Although an account with a good APY is a good investment, you still have to pay taxes on the interest earned.
Source:
The Complete Idiot's Guide to Managing Your Money By Robert K. Heady, Christy Heady, Hugo Ottolenghi
Personal Finance By Jack R. Kapoor, Les R. Dlabay, Robert James Hughes
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