What does Annual Percentage Yield (APY) represent?

Annual Percentage Yield (APY) represents the total interest paid on an account over the course of a year, expressed as a percentage of the principal. It incorporates not only the interest rate but also the effect of compounding, which means it takes into account how often interest is credited to the account. This provides consumers with a clearer understanding of how much they can earn over time, making it easier to compare different financial products.

While a fixed interest rate for savings accounts may be part of the APY calculation, APY itself is broader because it also factors in compounding frequency, which affects the total amount of interest earned. Therefore, options that reference specific monthly rates, fixed rates, or interest on loans do not encapsulate the comprehensive nature of APY as it pertains to the earnings potential on deposit accounts.