What is APY?
APY stands for annual percentage yield. It is the interest an account earns in a year, as a percentage, once compounding is counted. It is usually shown for savings and other deposit accounts.
Action level Worth checking
- Why you are seeing it
- It is shown on savings accounts and other deposit accounts.
- Why it matters
- It is the interest an account earns in a year once compounding is counted, so it lets you compare accounts that add interest at different intervals.
- What should I do?
- Compare APY with APY, and APR with APR, never one with the other.
- Treat an APY as a snapshot: rates on real accounts can change.
- A common misunderstanding
- An APY is not a promise. It is at or above the stated rate because interest also earns interest, and a rate can change.
- Other meanings
- APY is used for earning and APR for borrowing: a higher APY earns you more, while a higher APR costs you more.
See compounding change the number
The same rate, with interest added at different times of the year.
A 5.00% rate with interest added monthly is an APY of 5.12%.
- Yearly
- 5.00%
- Twice a year
- 5.06%
- Quarterly
- 5.09%
- Monthly
- 5.12%
- Daily
- 5.13%
| Interest is added | Times a year | APY |
|---|---|---|
| Yearly | 1 | 5.00% |
| Twice a year | 2 | 5.06% |
| Quarterly | 4 | 5.09% |
| Monthly | 12 | 5.12% |
| Daily | 365 | 5.13% |
- The more often interest is added, the more it earns on itself, so the APY rises a little above the rate.
- A learning example: real accounts have their own rules, and rates can change.
An estimate for learning, under the assumptions shown. Not financial advice, a quote or an offer.
How compounding changes the number
The interest rate is the base yearly rate. If interest is added to the account more than once a year, each addition starts earning interest too. APY includes that effect, so it is at or above the stated rate, and the gap grows with the rate and with how often interest is added.
The simple formula is APY = (1 + r ÷ n)^n − 1, where r is the yearly rate as a decimal and n is the number of times a year interest is added. Banks follow the exact day-count method in the deposit rules, so a bank's own figure can differ very slightly.
A simple example
A 5% rate with interest added monthly
APY = (1 + 0.05 ÷ 12)^12 − 1, which is about 5.12%.
If the same 5% were added only once a year, the APY would be 5.00%. Added daily, it would be about 5.13%.
APY and APR
APR is used for borrowing and APY for earning. APY counts compounding; APR does not. When you borrow, a higher number costs you more; when you save, a higher number earns you more. Compare APY with APY, and APR with APR.
APY and simple interest
Simple interest is paid only on the original amount. With compounding you also earn interest on interest, which is why APY is a bit higher than the rate. Rates on real accounts can change, so an APY is a snapshot, not a promise.