Trading term

What is APY (annual percentage yield)?

APY is the rate you actually earn over a year once your interest starts earning interest of its own. It's the same money as the quoted rate, just counted properly: 5% APR compounded monthly works out to 5.1162% APY.

A rate on its own doesn't tell you when the interest gets added. Take 5% paid once at the end of the year, versus 5% split into twelve monthly instalments. The second pays more, because January's interest sits in the account earning interest for the remaining eleven months. APY is the number that includes that effect.

The formula is one plus the rate divided by the number of compounding periods, raised to the power of that number, minus one. On a 5% quoted rate: paid annually it's 5.0000% APY, quarterly 5.0945%, monthly 5.1162%, daily 5.1267%. The gaps look small because the rate is small. Run the same calculation on a 21.22% credit card compounding daily and the effective rate is 23.63%, which is 2.41 points of cost that the headline number never mentioned.

APY is the right basis for comparing deposits, because it's the one figure that already has compounding folded in. Two accounts both advertising 5% are not the same account if one pays monthly and the other pays once a year. On the borrowing side the same effect is usually left in the small print instead, quoted as an APR that compounds more often than annually.

For example

You put $10,000 into an account at 5% APR, compounded monthly. A flat 5% would pay $500. The APY is 5.1162%, so you finish the year with $511.62 of interest — $11.62 more, for doing nothing differently.

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Why it matters to you

APY is the only deposit comparison that's genuinely like for like. Every account quotes a rate, and the rate alone hides how often it pays. When two products advertise the same headline number, the difference between them is sitting entirely in the compounding frequency, and APY is where that difference becomes visible. On a credit card the same arithmetic runs against you instead.

⚠ APR and APY answer different questions

Deposits usually get advertised as APY and loans as APR, and there's a reason for that: APY is the bigger number and APR is the smaller one. Putting a savings APY next to a loan APR compares two different measurements and makes the gap between them look narrower than it is. Convert both to the same measure before deciding anything.

Frequently asked questions

What's the difference between APR and APY?

APR is the quoted annual rate without compounding folded in. APY is what a year of that rate is actually worth after the interest compounds. A 5% APR compounded monthly is a 5.1162% APY, so the same account can be advertised as either number.

How do you calculate APY?

Divide the rate by how many times a year it compounds, add one, raise the result to the power of that same number, then subtract one. For 5% compounded monthly: (1 + 0.05 ÷ 12) to the 12th power, minus one, gives 5.1162%.

Does a higher APY mean I earn more money?

Between two accounts at the same quoted rate, yes, because the higher APY compounds more often. But APY doesn't create anything. Compounding earns the extra money, and APY is simply the honest way of reporting it.

Does APY apply to loans as well?

The maths does, though the word usually doesn't. A credit card quoted at 21.22% APR and compounding daily costs an effective 23.63% a year. Lenders normally quote the APR, so it's worth checking how often the balance compounds.