Learn what APY measures, how compounding affects returns, and why APY is better than the nominal rate for comparing savings products.
Annual percentage yield (APY) measures the annual return on a deposit or investment after taking compounding into account.
This page now also replaces the old APY calculation guide, so the formula and example sit alongside the practical explanation of why APY is the right comparison rate.
That makes APY more informative than a simple nominal rate when interest is credited more than once per year.
where:
If two bank accounts advertise the same nominal rate but compound at different frequencies, the account with more frequent compounding will usually have the higher APY.
That is why APY is a better apples-to-apples comparison tool for savers.
Suppose a deposit account offers a 5% nominal rate compounded monthly:
The difference looks small over one year, but over large balances or many years it becomes meaningful.
Annual percentage rate (APR) is usually used to describe borrowing cost.
APY is usually used to describe what the saver earns.
So:
The similar names cause confusion, but they are meant for different sides of the financial transaction.
Compounding means interest earns interest.
The more often it is credited, the higher the effective annual return, assuming the same nominal rate.
That is why APY is especially important in:
APY helps compare return rates, but it does not answer every question.
It does not fully capture:
An account with a strong APY may still be unattractive if access or risk terms are poor.