The APY (Annual Percentage Yield) refers to the rate of return from a deposit or investment after taking compound interest into account. Unlike simple interest, where the interest is only based on the principal (initial) amount of the loan, compound interest takes both the principal value and the interest from past periods into account. Therefore, compound interest means that your account balance gets larger along with the amount of interest you pay. The APY should not be confused with the APR, which is a metric that uses simple interest and indicates how much money an investment/deposit can make after a year.
The formula for calculating the APY is as follows:
APY = 100 [(1 + r/n)^n] – 1
r - annual interest rate (as a decimal)
n - number of compounding periods per year
Through this formula we can therefore understand that you can increase your APY by increasing n (i.e. increasing the no. of compounding periods per year). Therefore, many investors choose to compound quarterly or even more frequently as opposed to annually.