Annual Percentage Yield - APY

This is a sort of step sibling to annual percentage rate. APR represents the rate you have to pay on a loan. Meanwhile, annual percentage yield measures the return on a given investment.

You have $1,000 placed in an investment that pays a 10% APY, However, you only keep it there for 6 months, meaning you secure a profit during that time of $50. Your return on the $1,000 is 5%, but the APY is 10%, because if you had kept it there for a full year, it would have returned $100.

APY calculations also assume compounding interest. This comes up in things like bank accounts, where interest is paid on a monthly basis. The assumption is that you will keep the interest earned in your account, where it will receive further interest the following month. If instead, you spend these monthly installments, rather than letting them accumulate compounding interest (and good luck finding something small enough to buy with a monthly interest payment from a bank account), then your actual return for a year might come in below the bank's stated APY.