In this episode, we break down the Annual Percentage Yield (APY), a normalized representation of an interest rate based on a compounding period of one year. We discuss how APY figures allow for a reasonable, single-point comparison of different financial offerings that use varying compounding schedules, noting that these figures do not account for account fees.

Listeners will learn the critical difference between APY and the Annual Percentage Rate (APR); while APR usually refers to the rate paid by a borrower, APY generally refers to the rate paid to a depositor. Financial institutions often quote APY because it highlights the higher return a customer receives at the end of a term due to compounding.

We also explore the mathematical side of APY, illustrating how the formula $(1 + i_{nom}/N)^N - 1$ demonstrates that as the nominal inte ...