APY vs. APR: What's the Difference?
APY (Annual Percentage Yield) shows how much interest a deposit account earns over one year, including the effect of compounding. A nominal annual interest rate is the stated yearly rate before accounting for interest compounding within the year.
For a positive nominal rate, APY is equal to or higher than the nominal rate. The difference depends on how frequently interest compounds: more frequent compounding produces a slightly higher effective annual yield when the stated rate stays the same.
The terms APR and interest rate are not interchangeable in every financial context. APR is also used in lending disclosures, where it can include costs beyond the interest rate. This calculator uses APR as the input label for the nominal annual rate used in the APY formula.
APY formula
For a nominal annual interest rate compounded a fixed number of times per year:
APY = (1 + r÷n)ⁿ − 1
where r = nominal annual interest rate expressed as a decimal
where n = number of compounding periods per year
Example: 5% nominal annual rate compounded monthly gives:
APY = (1 + 0.05÷12)¹² − 1 ≈ 5.12%
This formula assumes the stated rate remains constant throughout the year. For continuous compounding, APY is calculated as er − 1.
Why do banks advertise APY?
In the United States, the Truth in Savings Act and its implementing regulation, Regulation DD, establish disclosure requirements for covered deposit accounts. These rules generally require covered institutions to disclose the annual percentage yield, subject to the regulation's specific requirements and exceptions.
APY is useful when comparing savings accounts and certificates of deposit because it expresses the effect of compounding as an annual yield. However, APY is not the only factor to consider: account fees, minimum balance requirements, withdrawal restrictions, introductory offers, and variable rates can affect how useful an account is for your needs.
Disclosure requirements vary by account type and jurisdiction, so don't assume the same rules apply to every financial product or country.
How much does compounding frequency actually matter?
Less than most people expect, past a certain point. Here's the same 5% stated rate at every common compounding frequency:
| Compounding | APY on 5% APR |
|---|---|
| Annually | 5.00% |
| Semi-Annually | 5.06% |
| Quarterly | 5.09% |
| Monthly | 5.12% |
| Daily | 5.13% |
| Continuous | 5.13% |
The daily calculation assumes 365 compounding periods per year. Actual financial products may use different calculation conventions and account terms, so their disclosed APY may not match a simplified calculation exactly.
For this example, moving from annual to monthly compounding increases APY by about 0.12 percentage points. Moving from monthly to daily compounding adds less than 0.01 percentage points. The difference between daily and continuous compounding is smaller still.
This illustrates an important point: when comparing savings accounts, compare their APYs rather than relying on compounding frequency alone. A higher compounding frequency does not necessarily mean a better account if the advertised APYs, fees, or other terms differ.
How to compare savings accounts using APY
APY lets you compare the annualized yield of deposit accounts even when they compound at different frequencies. To estimate the interest you could earn, consider your balance, the APY, how long you keep the money deposited, and the account's terms.
Other factors matter too. A variable APY can change over time, an introductory rate may expire, and account fees can reduce the benefit of the interest you earn. Check the full terms before choosing an account.
Worked Example: How APY Translates to Dollars
The table below illustrates the approximate interest earned over one year at two different APYs.
| Savings Balance | APY | Approx. Interest in One Year |
|---|---|---|
| $1,000 | 4.00% | $40 |
| $1,000 | 4.50% | $45 |
| $10,000 | 4.00% | $400 |
| $10,000 | 4.50% | $450 |
These estimates assume a constant APY, no additional deposits or withdrawals, and no account fees. They illustrate annualized growth, not a guarantee of the amount a particular account will pay. Actual results depend on the account's rate, terms, and balance changes.
How APY relates to compound interest
These three terms describe related but different concepts:
- Nominal interest rate: The stated yearly rate before accounting for the effect of compounding within the year.
- APY (Annual Percentage Yield): The effective yield over one year after accounting for compounding, assuming the rate and applicable terms remain unchanged.
- Compound interest: Interest earned on the original deposit and on interest previously added to the balance.
APY makes it easier to compare one-year yields, while compound interest helps explain how a balance can grow over multiple years. Actual long-term growth also depends on rate changes, deposits, withdrawals, fees, and other account terms.
Use our Compound Interest Calculator to estimate how a balance can grow over time. If you're saving toward a target, the Savings Goals Calculator can help estimate how much you may need to save and how long it could take.
Frequently asked questions
What is the difference between APY and APR?
APY reflects the effect of compounding over a year, while a nominal annual interest rate does not. For a positive nominal rate, APY is equal to or higher than that rate. In lending, APR can have a different meaning and may include certain borrowing costs, so check which rate a financial product is quoting.
How do you calculate APY from APR?
For a nominal annual rate compounded a fixed number of times per year, use: APY = (1 + r÷n)n − 1, Here, r is the annual rate as a decimal and n is the number of compounding periods per year. For example, a 5% nominal annual rate compounded monthly produces an APY of approximately 5.12%. Enter the rate and compounding frequency in this calculator to calculate the result.
Does more frequent compounding always earn more interest?
For the same positive nominal annual rate, more frequent compounding produces a slightly higher APY. However, the increase becomes smaller as compounding becomes more frequent. When comparing accounts, a higher compounding frequency alone does not guarantee a better return; compare the APY and the account's other terms.
If two savings accounts have the same APY, will they earn the same interest?
With the same starting balance, the same time period, and no deposits, withdrawals, or fees, accounts with the same APY would produce approximately the same interest over a full year. Actual earnings can differ if rates change, balances change, fees apply, or the accounts have different terms.
What's a good APY for a savings account?
There is no single APY that is always considered good. It depends on the current interest-rate environment and the rates available from comparable accounts. Compare current offers, check whether the rate is variable or promotional, and consider fees, minimum balances, access to your money, and any applicable deposit protections.
Does APY change over time?
It can. Many savings accounts have variable rates, so their APY may rise or fall as market conditions and the provider's rate decisions change. A quoted APY is not necessarily guaranteed for the life of the account. Check the account terms to see whether the rate is variable or fixed and whether any introductory offer expires.