APY (Annual Percentage Yield)

Definition

APY is the effective annual rate after compounding. It makes products with different compounding frequencies easier to compare.

Formula

APY = (1 + APR/n)^n - 1

Example

If APR is 12% and compounding is monthly (n=12), APY = (1+0.12/12)^12 - 1 = 12.68%.

How to use it

• APY includes compounding; APR does not.
• The difference between APR and APY grows with more frequent compounding.
• Use APY for savings yields and APR for loan costs.
• Compare products with the same compounding frequency when possible.
• Ask whether the rate is fixed or variable; APY can change with rate resets.

Common mistakes

• Comparing APY on one product to APR on another.
• Ignoring fees that reduce the effective yield.
• Mixing nominal APR assumptions with effective APY outcomes.
• Using a teaser APY without checking how long it lasts.

Why this matters

This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.

Practical checklist

• Write a 1-line definition for "APY (Annual Percentage Yield)" that your team will use consistently.
• Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
• Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
• Use a calculator that references this term (e.g., APR to APY Calculator) to sanity-check assumptions.
• Read the related guide (e.g., APR vs APY: how compounding changes the effective rate) for context and common pitfalls.

Where to use this on MetricKit