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DAO Treasury Management

What is APY?

The annual percentage yield (APY) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, compounding interest is calculated periodically and the amount is immediately added to the balance. With each period going forward, the account balance gets a little bigger, so the interest paid on the balance gets bigger as well.

KEY TAKEAWAYS

- APY is the actual rate of return that will be earned in one year if the interest is compounded.
- Compound interest is added periodically to the total invested, increasing the balance. That means each interest payment will be larger, based on the higher balance.
- The more often interest is compounded, the higher the rate will be.

APY standardizes the rate of return. It does this by stating the real percentage of growth that will be earned in compound interest assuming that the money is deposited for one year. The formula for calculating APY is:

APY vs. APR

APY is similar to the annual percentage rate (APR). The APR reflects the effective percentage that is earned without compounding. APY and APR are both standardized measures of returns that are expressed as an annualized percentage rate.

However, APY takes into account compounding returns while APR does not.

How Friktion's APYs are calculated

The extrapolated premiums displayed are calculated from the time-weighted average of the latest 32 epochs' premiums. If there were epochs that ended with a negative return, the yield for that epoch is counted as 0% for the purposes of this extrapolation, but the negative PnL is not included in the calculation. For calculations inclusive of epochs with losses, see the Analytics page. APY depends on market conditions!

Example of APY

Assume Alice deposits $100 in the SOL Cash Secured Put Volt and earns 0.30% every week. Assuming the Volt doesn't get exercised, Alice would earn 0.30% * 52 (1 epoch per week) = a 15.6% return on her investment if it was simple interest or non-compounding. **The APR on this investment is 15.6%. **

Now assume that the return is compounding, in that the payments Alice earns every week is invested back into the Volt automatically. Alice would earn (1+0.156/52)**52 = 0.16855. T**he APY on this investment is 16.855%.**

APY incorporates the power of compounding as shown below:

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