phlik,

Here's an example of APY:

On January 1st you deposit $100 in a savings account that earns 5% APY.  If you
make no withdrawals, your account would be worth $105 on December 31st .
Each month you will earn .4078% interest on the balance of your account.

Beginning $100.00 
Jan .4078% 100.41 
Feb .4078% 100.82 
Mar .4078% 101.23 
Apr .4078% 101.64 
May .4078% 102.06 
Jun .4078% 102.47 
Jul .4078% 102.89 
Aug .4078% 103.31 
Sep .4078% 103.73 
Oct .4078% 104.15 
Nov .4078% 104.58 
Dec .4078% 105.00 

As you can see, for the first month you earned forty-one cents.  If you withdrew that
money and put it in a cigar box under your bed, at the end of twelve months you would
have $100 in the savings account and $4.92 in the cigar box.

By keeping the interest in the bank, the interest earns another eight cents interest.

APY works in reverse when you borrow money.  The APY is lower than the period rate of
interest -- because you pay down the interest each month.

I hope this helps.  If you still have a question post another message.  

Fool On!

Casey