Interest calculated on principal and accumulated interest.
Simple interest is nearly always quoted at the annual rate. But interest is often accounted for on a monthly or daily basis. Each period a small amount of additional interest is compounded. The discrepancy between the Annual Percentage Rate and the actual Annual Percentage Yield is the compound interest.
As an illustrative example, take a credit card. The APR rate is quoted at 12%. The 12.68% ARY figure takes into account the 12 compounding months, where interest is charged on interest already accumulated.
| Credit Card Example | Periodic Rate | ||
| Annual Percentage Rate | 1% Month | 12% | APR |
| Annual Percentage Yield | 1% Month | 12.68% | APY |
Take another example with a bank certificate of deposit. APR is quoted at 12%. Should the depositor leave the full amount in the CD for a full year, taking into account the daily compound interest they would have yielded a full 12.74% annual interest rate.
| Bank CD Example | |||
| Annual Percentage Rate | 12% Year | 12% | APR |
| Annual Percentage Yield | 1+(.12/360)^360 | 12.74% | APY |