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APY

APY (Annual Percentage Yield) is the total yearly return on a savings account, CD, or investment — expressed as a percentage and including the effect of compounding. When comparing savings products, APY is the fair number.

Updated April 2026 · 4 min read
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Definition

APY (Annual Percentage Yield) is the total yearly return on a savings account, CD, or investment — expressed as a percentage and including the effect of compounding. When comparing savings products, APY is the fair number.

What it means

APY captures the reality that money in a savings product earns returns on its own earnings — the compounding effect. A savings account paying 5.00% nominal interest but compounding daily actually earns about 5.12% APY over a year. When banks and credit unions advertise savings products, US regulation (the Truth in Savings Act) requires them to show APY, precisely because raw interest rates don't reflect compounding frequency. A 5% interest rate compounded monthly is a lower real return than the same 5% compounded daily — APY makes that difference visible.

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Formula

APY = (1 + r/n)^n − 1   where r = nominal rate, n = compounding periods per year

Why it matters

APY is the number to shop with for savings accounts, CDs, money-market accounts, and bonds. A bank offering '5.25% APY' vs another offering '5.20% interest rate compounded monthly' (APY ≈ 5.33%) — the second is actually the better deal despite the lower headline. Always compare APY to APY.

Example

$10,000 in an account paying 5.00% interest compounded daily earns 5.13% APY, or $513, over a year. The same 5.00% compounded annually earns 5.00% APY, or $500. Small spread — but over 30 years on a retirement account, that difference compounds into thousands.

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Frequently asked questions

Why is APY higher than the nominal rate?

Because compounding earns interest on interest. The more frequently an account compounds (daily > monthly > annually), the larger the gap between the nominal rate and APY.

Is APY always positive?

For savings products, yes. For investments with variable returns (stocks, crypto), 'APY' is sometimes used loosely to mean projected return — which can be negative.

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