What is APY?
Updated
APY, or Annual Percentage Yield, represents the expected rate of annual return that takes into account the effect of compounding interest.
To better understand APY, it's important to first understand the concept of compound interest. Essentially, compound interest is the interest earned on previously earned interest.
When calculating APY, the frequency at which interest is compounded over the investment period must be taken into account. This makes calculating APY more complicated compared to a simple annual interest rate.
The formula used to calculate the final amount based on APY is:
A = [P (1 + R/N)N]
where P is the initial investment amount, R is the APY rate, N is the number of compounding periods during the investment period, and A is the final amount.
As the number of compounding periods increases, the final payout will also increase. For example, if you invest 1.0 Ether per year at an APY of 24%, and interest is compounded monthly (12 times per year), the final payout will be:
[1.0 Ether × (1 + 0.24/12)12] = 1.2682 Ether
In summary, APY takes into account the effect of compounding interest, which can lead to higher returns on investments over time.
