Glossary term
APY (Annual Percentage Yield)
APY is the amount you actually earn on savings in one year, expressed as a percentage, after accounting for how often interest compounds. A higher compounding frequency pushes APY above the stated interest rate. Banks must disclose APY under federal Truth in Savings rules, so it is the fairest way to compare accounts.
Updated October 17, 2026 · Editorial Team
How APY (Annual Percentage Yield) works in practice
The stated rate on a savings account or CD is a nominal rate. If interest is credited monthly, each month's interest starts earning interest of its own, so the year-end gain is a little larger than the nominal rate suggests. APY captures that effect in one number using the formula APY = (1 + r ÷ n)^n − 1, where r is the nominal rate and n is the number of compounding periods per year.
Take a 4.50% nominal rate compounded monthly. Divide by 12 to get 0.375% per month, raise 1.00375 to the 12th power, and subtract 1. The result is an APY of about 4.59%. On a $10,000 deposit left alone for a year, that is $459.40 of interest instead of the $450.00 simple interest would produce.
When you shop for savings accounts or CDs, compare APY to APY, never a rate to an APY. The difference between compounding schedules is small at low balances but adds up over many years. APY also assumes you leave the interest in the account; withdrawing it as you go means you earn the plain rate instead.
APY (Annual Percentage Yield): quick questions
What is the difference between APY and APR?
APY measures what you earn on deposits and includes compounding. APR measures what you pay to borrow and includes certain fees but generally not compounding.
Can APY change after I open an account?
On most savings and money market accounts, yes, because the rate is variable. A CD's APY is usually fixed for its term.
Is a higher APY always better?
For the same kind of account, a higher APY earns more. Also check minimum balances, monthly fees and, for CDs, early withdrawal penalties.
Sources
- Regulation DD (Truth in Savings), 12 CFR Part 1030 — eCFR / National Archives. Accessed October 17, 2026.
- Consumer Resource Center — Federal Deposit Insurance Corporation. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations. See our methodology.
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