What Is APY?
APY (Annual Percentage Yield) is the real rate of return on a savings account or investment, accounting for the effect of compounding interest over one year. Unlike APR, which is just the stated rate, APY reflects what you actually earn.
APY is what you actually earn. APR is what the bank advertises. They're the same only if interest compounds once a year. For everything else, APY > APR.
APY vs APR: The Key Difference
| APR (Annual Percentage Rate) | APY (Annual Percentage Yield) | |
|---|---|---|
| What it is | Stated interest rate, no compounding | Effective rate after compounding |
| Compounding included? | No | Yes |
| Where you see it | Loan rates, credit cards | Savings accounts, CDs |
| Which is higher? | Lower (looks cheaper for lenders) | Higher (shows true return) |
| Used by banks for | Loan products (makes cost look lower) | Savings products (shows true yield) |
The APY Formula
- r
- Annual interest rate (APR) as a decimal
- n
- Number of compounding periods per year
Example: A savings account advertises 5% APR compounded monthly:
APY = (1 + 0.05/12)^12 − 1 = (1.004167)^12 − 1 = 5.116%
APY Calculator: APR to APY Converter
APY Comparison: Same APR, Different Compounding
| Compounding | APR | APY | $10k after 1 year |
|---|---|---|---|
| Annual | 5.00% | 5.000% | $10,500.00 |
| Semi-Annual | 5.00% | 5.063% | $10,506.25 |
| Quarterly | 5.00% | 5.095% | $10,509.45 |
| Monthly | 5.00% | 5.116% | $10,511.62 |
| Daily | 5.00% | 5.127% | $10,512.67 |
How to Use APY to Compare Savings Accounts
When comparing savings accounts or CDs, always compare APY, not APR. A 5.10% APY at one bank is better than a 5.15% APR daily compounding at another (which equals 5.13% APY).
Find the APY on every account you're comparing — it must be disclosed by law (Truth in Savings Act)
Compare APYs directly — the higher APY always pays more, regardless of compounding frequency or stated APR
Factor in any minimum balance requirements, monthly fees, or withdrawal restrictions that could reduce your effective yield
For CDs, check whether interest is credited monthly or at maturity — credited monthly allows compounding within the CD term
APY on Investments vs Savings Accounts
For savings accounts and CDs, APY is a fixed, guaranteed number. For investments (stocks, funds), returns vary and there's no stated APY. When people say a stock returned "10% APY," they mean the annualized compound return was 10% — the equivalent concept applied to variable returns.
Investment returns are often expressed as CAGR (Compound Annual Growth Rate) rather than APY. CAGR = (Ending Value / Beginning Value)^(1/years) − 1. It's mathematically equivalent to APY but applied to historical performance rather than a stated rate.