Which statement about APY is true?

Which statement about APY is true?

• A. APY reflects the effect of compounding on deposits.
• B. APY reflects only the nominal interest rate, ignoring compounding.
• C. APY applies to loans, not deposits.
• D. APY determines credit limits.

Answer: (A)

APY measures the actual interest earned on a deposit over a year, taking into account how often interest is added to the balance. Because interest can earn interest, the same nominal rate yields a higher APY when compounding happens more frequently (for example, daily versus monthly). This is why APY is the standard way to compare savings accounts and CDs — it shows the real return after compounding. APY is not used to describe loan costs (that’s typically APR) and it doesn’t determine credit limits.

APY measures the actual interest earned on a deposit over a year, taking into account how often interest is added to the balance. Because interest can earn interest, the same nominal rate yields a higher APY when compounding happens more frequently (for example, daily versus monthly). This is why APY is the standard way to compare savings accounts and CDs — it shows the real return after compounding. APY is not used to describe loan costs (that’s typically APR) and it doesn’t determine credit limits.