Annual percentage yield (APY) is the effective annual rate of return, which considers the total amount of interest earned from a deposit or investment over the course of one year, taking into account the frequency of compounding. APY is a figure that provides investors with a better understanding of the return on their investments over a period of time and accounts for the effect of interest compounding.

Compound interest is essentially add-on interest that is applied to a deposit or investment and earns additional interest itself on an ongoing basis. On a simple level, compound interest is calculated by adding the amount of interest earned and reinvesting it into the original deposit or investment. The result of compounding is that the investor earns interest on previous interest earning. As the investment continues to grow, the return on the investment increases as more money is compounded on a regular basis.

APY is commonly used for savings account products such as bank accounts, money market accounts, and certificates of deposit (CDs). It should also be noted that APY is calculated differently for loans and APR is used to track the progress and repayment of those loans. APY and APR are closely related concept, but APY works best for investments and deposits, while APR works best for loans.

APYs available on these products vary depending on several factors, including the type of investment, whether the rate is fixed or variable, and the amount of deposit or investment. Generally, the higher the APY, the higher the interest rate and the more money will be earned over the course of a year. By understanding the importance of APY and its relationship to interest compounding, investors can better understand the true return on their investments.