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APY

Investment

Annual Percentage Yield

The effective annual return on a deposit or investment after accounting for compounding, the right figure to use when comparing financial products with different compounding frequencies.

Definition

APY is the actual annual return you earn on a deposit or investment once compounding is factored in, making it the correct figure for comparing accounts with different compounding schedules. A nominal interest rate alone doesn't tell the full story, since compounding more frequently at the same nominal rate produces a higher effective return.

This is why two savings accounts advertising the same "interest rate" can pay out differently over a year, one compounding daily will produce a slightly higher APY than one compounding monthly. The Compound Interest Calculator shows this effect directly when comparing different compounding frequencies.

Formula

APY = (1 + r/n)^n − 1

Where r is the nominal annual interest rate and n is the number of compounding periods per year.

Worked Example

A savings account offers a 5% nominal annual rate, compounded monthly (n = 12):

  • APY = (1 + 0.05/12)^12 − 1 ≈ 5.116%

Compare that to the same 5% nominal rate compounded annually (n = 1), which gives an APY of exactly 5%. The monthly compounding version pays out slightly more over the year, purely from compounding frequency.

Key Things to Know

  • Always compare APY, not the nominal rate, across accounts. The nominal rate alone hides the effect of compounding frequency, which is exactly what APY corrects for.
  • More frequent compounding always produces a higher or equal APY. Daily compounding beats monthly, which beats annual, at the same nominal rate, though the differences shrink at typical savings rates.
  • APY assumes funds stay in the account for the full year. Withdrawing early or adding funds mid-year changes your actual realized return away from the stated APY.
  • Fixed vs variable APY matters for planning. A CD locks in its APY for the full term, a regular savings account's APY can move with broader rate changes at any time.
  • Fees can erode APY's real-world value. A high APY account with monthly maintenance fees can underperform a lower APY, no-fee account for smaller balances.

Related Calculators

Compound Interest Calculator →Calculate how your investment grows with compound interest. Get future value and see the impact of regular contributions — free and instant.

Related Terms

CompoundingCompounding (Compound Growth)Rule of 72Rule of 72

Frequently Asked Questions

Is APY the same as the interest rate advertised on an account?
Not quite. The nominal or stated interest rate doesn't account for compounding frequency, while APY reflects the actual return you'd earn over a year once compounding is factored in. Two accounts with the same nominal rate can have different APYs if they compound at different frequencies.
Why does compounding frequency change APY?
More frequent compounding means interest starts earning its own interest sooner within the year, slightly boosting the effective return. Daily compounding produces a marginally higher APY than monthly compounding at the same nominal rate.
Should I always choose the account with the highest APY?
APY is the right comparison metric for pure return, but also check for fees, minimum balance requirements, and liquidity restrictions, since a slightly lower APY account without fees can sometimes outperform a higher APY account with hidden costs.
Does APY apply to loans as well as savings?
The equivalent concept for loans is often called APR (Annual Percentage Rate), which serves a similar comparison purpose but for borrowing costs rather than investment returns, and the two aren't calculated identically.
Can APY change over the life of an account?
Yes, especially for variable-rate savings accounts, where APY can be adjusted by the bank in response to broader interest rate changes, unlike a fixed-rate CD which locks in its APY for the term.