Annual percentage yield (APY) is the amount of interest you actually earn on a deposit in one year, expressed as a percentage, once compounding is included. It answers a simple question: if I leave $100 here for a year, how much will I have? At a 5% APY, the answer is $105.
The APY formula
APY = (1 + r/n)n − 1
- r — nominal annual interest rate (decimal)
- n — compounding periods per year
Example: a 5% nominal rate compounded monthly gives (1 + 0.05/12)12 − 1 = 0.051162, or 5.12% APY.
Why APY exists
Two accounts can quote the same interest rate and pay different amounts because they compound at different frequencies. APY puts everything on one footing. In the United States, banks are required to disclose APY on deposit accounts for exactly this reason. Other countries use similar measures, such as AER (annual equivalent rate) in the UK.
Comparing accounts with APY
| Account | Stated rate | Compounding | APY |
|---|---|---|---|
| A | 5.00% | Annually | 5.00% |
| B | 4.90% | Daily | 5.02% |
| C | 5.00% | Monthly | 5.12% |
Account B has a lower stated rate than A but a higher APY, so it pays more. Account C pays the most.
APY vs APR
| APY | APR | |
|---|---|---|
| Used for | Savings and deposits | Loans and credit |
| Includes compounding? | Yes | Usually no |
| Includes fees? | No | Often some fees, depending on local rules |
| Higher is better for… | You (as a saver) | The lender |
Banks naturally prefer to show APY on savings (the bigger number) and APR on loans (the smaller number). When comparing a loan, work out its effective rate to see the true yearly cost.
Converting APY back to a nominal rate
r = n × [ (1 + APY)1/n − 1 ]
A 5% APY compounded monthly corresponds to a nominal rate of 4.889%. That is the rate you would enter in a calculator that asks for a nominal rate and monthly compounding.
Using APY in calculations
Because APY already includes compounding, you can project a balance with annual compounding: A = P × (1 + APY)t. $15,000 at a 4.25% APY earns $637.50 in one year. Do not compound an APY again monthly — that would double-count compounding.
Limitations
- APY assumes the rate stays the same for a year. On a variable-rate account, it is a snapshot.
- It assumes interest stays in the account. If you withdraw the interest, you earn the nominal rate.
- It ignores fees and tax.
Every compound calculator on this site shows the effective annual rate (APY) next to the result. Try the Compound Interest Calculator, or read How to Calculate Interest on Savings.