What Is Annual Percentage Yield (APY)?
APY stands for Annual Percentage Yield in quantitative finance. It is a measure used to represent the effective annual rate of return or the annualized rate of interest earned on an investment or deposit, taking into account the effect of compounding interest.
Unlike APR (Annual Percentage Rate), which only considers the nominal interest rate, APY factors in the compounding frequency of interest payments. This means that APY reflects the total amount of interest earned or paid over a year, including the effect of reinvesting interest earnings or paying interest on previously earned interest.
APY is particularly useful for comparing the true returns of different investment or deposit options, as it provides a standardized way of expressing the annualized rate of return while accounting for compounding. It allows investors to make more informed decisions about where to allocate their funds based on the actual returns they can expect to earn.
In trading Compound Annual Growth Rate (CAGR) is more commonly used. APY is used for loans, delta neutral trading strategies and yield farming in decentralised finance.
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