Calculating APY reveals how much compounding impacts balances. Compound or compounding interest is commonly thought of as “interest on interest.” It’s calculated on the initial principal, including all the interest that principal accumulates each period. This is in contrast to simple interest, which is calculated only on the principal amount, not including additional accrued interest. Interest can be compounded at any set schedule including continuously, daily, monthly or annually. That frequency makes the difference in how much the initial principal will be impacted by interest.