How APY Works (and How It Differs from APR)

Annual percentage yield, or APY, is the amount your money actually earns in a year once interest starts earning interest. It is the number that lets you compare savings accounts and CDs fairly, because it folds in how often the interest compounds.

The APY formula

APY = (1 + r / n) raised to the power n, minus 1 — where r is the nominal annual rate and n is the number of compounding periods per year. A 5% rate compounded monthly gives an APY of about 5.12%, because each month's interest starts earning its own interest.

Why compounding frequency matters

• The same nominal rate produces a higher APY the more often it compounds — daily beats monthly beats annually.
• Two accounts advertising the same rate can pay different amounts; the APY is what tells them apart.
• The gap widens as the rate rises, so at higher rates the compounding frequency matters more.

APY vs APR

They look similar but describe opposite sides of a transaction. APY measures what you earn and includes compounding, so it is used for savings and investments. APR measures what you pay to borrow and, by convention, does not compound within the year — it is used for loans and credit cards. When you are saving, a higher APY is better; when you are borrowing, a lower APR is better.

Convert any rate to its effective yield and project your savings with the calculators below.