Annual percentage yield (APY)
Also called Effective annual rate
The actual yearly return on a deposit once compounding is included, used to compare savings accounts and CDs.
What it means
APY shows how much a deposit really earns in a year, taking into account how often interest compounds. Because compounding adds interest on interest, APY is equal to or higher than the stated nominal rate. Banks are required to disclose APY on deposit accounts, which makes accounts with different compounding schedules easy to compare.
APY is the savings-side counterpart to APR. Borrowers see APR, which ignores compounding; savers see APY, which includes it. For the same stated rate, more frequent compounding produces a slightly higher APY.
Formula
APY = (1 + r / n)^n − 1
- r = nominal annual rate as a decimal
- n = number of compounding periods per year
Example
Suppose an account pays a nominal 6% compounded monthly. APY = (1 + 0.06 ÷ 12)^12 − 1 = 1.005^12 − 1, or about 6.17%. A $10,000 deposit would earn about $617 in a year instead of $600.
How it’s used
- Comparing savings accounts, money market accounts and CDs
- Converting a stated rate into what a deposit actually earns
- Understanding why compounding frequency matters
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.