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What is APY?

 

So, you’ve seen it everywhere, but you’re not exactly sure what APY means. APY is one of the more popular terms to understand when it comes to banking and how your money grows. Keep reading below to get a quick overview on what APY means.

APY stands for Annual Percentage Yield. It is basically a fancy name for the rate of return you get on your money after accounting for compounded interest.

In a nut shell, Annual Percentage Yield tells you how much you’ll earn with compounded interest over the course of one year. It’s a more accurate reflection of your true potential earnings. A higher APY is usually better when you’re looking at savings accounts, but a lower APY is best when you’re paying interest.

You may have also asked yourself why interest gets paid out as a percentage. This is because it’s a percentage of your account balance.

Here’s an example:

John decides to deposit $1,000 into a CD Special at Cornerstone Bank that pays a 5% annual interest rate. At then end of one year, John would have $1,050 if the interest is paid out annually. However, Cornerstone Bank pays CD interest monthly. This means the interest is compounded.

Compounded interest is interest earned on both the money John put into the account and the interest he receives over time. Here is a chart showing John’s monthly earnings and total balance based on compounded interested:

Month
Earnings
Total Balance

1

$ 4.17

$ 1,004.17

2

$ 4.18

$ 1,008.35

3

$ 4.20

$ 1,012.55

4

$ 4.22

$ 1,016.77

5

$ 4.24

$ 1,021.01

6

$ 4.25

$ 1,025.26

7

$ 4.27

$ 1,029.53

8

$ 4.29

$ 1,033.82

9

$ 4.31

$ 1,038.13

10

$ 4.33

$ 1,042.46

11

$ 4.34

$ 1,046.80

12

$ 4.36

$ 1,051.16

The formula below can be used to calculate how much interest you, or John in this case, will earn each month with compounded interest:

APY= (1 + r/n )n – 1

 

r- annual interest rate

n- number of compounding periods (monthly would be 12)

If compounded monthly, John would have a balance of $1,051.16 after one year, making his APY 5.116%. Although this may not seem like a major difference, the account balance increases over time. The more time that passes, the more money will be in your account to accrue interest. Compounded interest pays off in the long run.

Are you looking to put money into a CD to grow higher returns than a normal savings account? Cornerstone Bank offers competitive rates and a wide range of terms on our CDs as well as rewards for customers who also do their primary checking with us. Check out our CD page for more information or give us a call at 479-253-2265.