SmartRateToolsDefinition
Annual Percentage Yield (APY) is the real rate of return on a savings account, CD, or investment over one year — accounting for the effect of compounding interest. It represents what you'll actually earn, not just the stated nominal rate.
How APY is calculated
The formula is: APY = (1 + r/n)^n − 1
- r = nominal annual interest rate (as a decimal)
- n = number of compounding periods per year
For example, a savings account with a 5% nominal rate compounded monthly:
- APY = (1 + 0.05/12)^12 − 1 ≈ 5.116%
That small difference compounds into meaningful extra earnings on large balances over time.
APY vs. APR
APR ignores compounding. APY includes it. This means APY is always equal to or greater than the APR for the same underlying rate.
- Banks advertise savings accounts using APY — it shows a higher number, making the account look more attractive
- Lenders advertise loans using APR — it shows a lower number, making the loan look cheaper
Both disclosures are legally required and technically accurate — you just need to know which to use where.
When to use APY
Use APY whenever you're comparing savings products:
- High-yield savings accounts
- Certificates of Deposit (CDs)
- Money market accounts
- Treasury bills and bonds (yield-equivalent comparisons)
When comparing two savings accounts, always compare their APYs — it's the most apples-to-apples measure of what you'll actually earn.
The bottom line
APY is the true return on your savings, compounding included. For savings accounts and CDs, a higher APY is always better. When comparing savings options, APY is your go-to number.