APY

What It Means

APY, the annual percentage yield, is the yearly rate a savings accountSavings accountA bank or credit union account for money you're setting aside for later, which earns interest and is insured up to federal limits at insured institutions. See more, CDCertificate of depositA deposit you agree to leave at a bank or credit union for a set term, until its maturity date, usually with a penalty for taking money out early. See more or other deposit account pays once compoundingCompound interestInterest paid on your original amount and on the interest it has already earned, so each year's interest is a little bigger than the last. See more is counted. Federal Truth in Savings rules (Regulation DD) define it by the account's interest rateInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more and how often interest compounds over a 365-day year, and set out how banks must calculate it. Because it already includes compounding, one account's APY can be compared directly with another's.

How It Sounds at Home

• "It says 4.07% APY on the savings account."
• "Is that the rate or the APY?"
• "Which one has the better APY?"

The Breakdown

Formula. For a rate compounded n times a year: APY = (1 + rate ÷ n)^n - 1. Regulation DD's Appendix A sets out the official calculation banks use for account disclosures and advertisements.

Worked example. $1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more,000 at an example 4.00% interest rate for one year, with different compounding:

What the result means. More frequent compounding lifts the APY, but at an everyday rate the gap is small: about $8 a year on this balance between yearly and daily compounding. The bigger differences come from the rate itself, which is why comparing APY with APY puts two accounts on the same footing whatever their compounding schedule.

APY and APR are different measures. APY describes what a deposit account pays you, while APR, used for loans and credit cards under separate federal rules, is the yearly cost of borrowing.

Good to Know

Regulation DD (12 CFR 1030.2), the federal Truth in Savings rule, defines the APY as a percentage showing the total interest an account pays based on its interest rate and how often it compounds over a 365-day period, and its Appendix A sets out the calculation for account disclosures and advertisements. The CFPB's official commentary adds that the APY reflects interest only, so a sign-up bonus isn't part of it. Credit unionsCredit unionA not-for-profit financial cooperative owned by its members, offering accounts and loans to people within the field of membership its charter sets. See more follow the NCUA's own Truth in Savings rule, 12 CFR Part 707. If an account's rate is variable, its APY can change after you open it.

Related Terms and Categories

• Compound interest

  Interest paid on your original amount and on the interest it has already earned, so each year's interest is a little bigger than the last.

• Interest rate

  The yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost.

• Savings account

  A bank or credit union account for money you're setting aside for later, which earns interest and is insured up to federal limits at insured institutions.

• Certificate of deposit

  A deposit you agree to leave at a bank or credit union for a set term, until its maturity date, usually with a penalty for taking money out early.

• High-yield savings account

  A savings account paying a variable interest rate that's generally higher than a traditional savings account's, often offered by online banks.

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