APY – Annual Percentage Yield Defined

APY or Annual Percentage Yield is the amount of money that is earned over a years time at a specific interest rate. The important thing to note is that the APY rates, are most commonly the rate advertised by a bank. Annual Percentage Yield rates are higher than the APR (annual percentage rate rates). The reason the rates differ is because APY takes into account the compounding of funds and thus the yield amount is higher, whereas APR is a simple rate at which the account accrues interest and is therefore lower. In other words, if I invested $1,000 into a bank’s certificate of deposit account for 1 year at 2.96% APR interest, my actual annual percent yield would be 3.00%. My account would earn money over the year at 2.96 percent and by the time the year is over, the interest I actually would earn would end up being 3 percent.

Variable APY and Fixed APY

Variable annual percentage yields are rates which fluctuate with the market. These accounts have no guarantee that the rate will stay constant. For example, I invested $20,000 into a one bank’smoney market account at 4% APY variable rate of interest in 2008. The current APY of that variable money market account is 1.3%.

Fixed annual percentage yields are rates which do not change regardless of time and market changes. Fixed apys are most common in certificates of deposit and the rates when you open the cd account will remain fixed (or unchanged) for the months or years you have the account. For example, in 2010 I invest $25,000 into a bank’s 5 year CD account at 3 percent fixed APY (2.96 percent APR) and until 2015 the rate will remain fixed and constant at 3 percent.

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