APY vs. APR — why they're not the same number
APR (Annual Percentage Rate) is the stated interest rate before compounding is factored in. APY (Annual Percentage Yield) is what you actually earn once interest starts earning interest on itself over the year. APY is always equal to or higher than APR for the same account, and the gap grows with how often interest compounds.
APY = (1 + APR÷n)ⁿ − 1 where n = number of compounding periods per year Example: 5% APR compounded monthly (n = 12) APY = (1 + 0.05÷12)¹² − 1 = 5.12% Why banks are required to advertise APY, not just the rate
In the US, the Truth in Savings Act (Regulation DD) requires banks to disclose APY — not just the nominal interest rate — on savings accounts, CDs, and money market accounts. That's why every bank ad, HYSA comparison site, and CD rate table you see quotes "APY": it's the only number that lets you fairly compare two accounts that might compound on different schedules.
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% |
Daily compounding here assumes 365 periods per year, not 360 or a leap-year-adjusted 365.25 — both alternate conventions exist in finance, but 365 is what banks use for consumer deposit accounts.
The jump from annual to monthly compounding is real — about a tenth of a percentage point on this example. But monthly, daily, and the theoretical "continuous" limit are nearly identical. A bank advertising daily compounding isn't offering you a meaningfully better deal than one compounding monthly at the same stated rate — the marketing difference is bigger than the financial one.
Frequently asked questions
What is the difference between APY and APR?
APR is the stated annual rate without accounting for compounding. APY is the actual yield you earn once interest compounds over the year, so it's always equal to or higher than APR. For savings accounts and CDs, APY is the number that matters for comparing offers.
How do you calculate APY from APR?
APY = (1 + APR÷n)ⁿ − 1, where n is how many times per year interest compounds. A 5% APR compounded monthly (n=12) works out to 5.12% APY.
Does a higher compounding frequency always mean more money?
Technically yes, but the difference shrinks fast. Going from annual to monthly compounding makes a real difference; going from monthly to daily makes almost none. Two accounts with the same APY pay the same regardless of how they compound — APY already accounts for it.
What's a good APY for a savings account?
This varies with the broader interest rate environment, so there's no fixed number that's always "good" — a high-yield savings account (HYSA) typically pays several times what a traditional big-bank savings account offers. Compare current offers directly rather than relying on a fixed benchmark.