APY (Annual Percentage Yield) is the real rate of return on a deposit account for one year, including the effect of compounding interest. A higher APY means more earnings. Federal law requires banks to disclose APY so you can compare accounts accurately.
APY stands for Annual Percentage Yield. It expresses how much interest a deposit account earns over one full year, taking into account how frequently interest compounds. Because compounding means you earn interest on your interest, an account that compounds daily will have a higher APY than one with the same nominal rate that compounds only annually. The CFPB's Truth in Savings rules (Regulation DD) require depository institutions to quote APY on savings products so consumers can make direct comparisons.
The formula for APY is: APY = (1 + r/n)^n − 1, where r is the annual interest rate (as a decimal) and n is the number of compounding periods per year. For example, an account paying a 4.00% nominal rate compounded daily (n = 365) yields an APY slightly above 4.00% because each day's interest becomes part of the principal for the next day's calculation. The more frequently interest compounds, the closer the APY gets to — but never quite reaches — continuous compounding.
Regulation DD, enforced by the CFPB, requires banks to display APY — not just the nominal interest rate — in advertisements and account disclosures. When comparing savings accounts, CDs, or money market accounts, always use APY as the apples-to-apples figure. One account advertising a '4.00% interest rate, compounded daily' and another advertising '4.07% APY' may be offering the identical product; the second disclosure is simply more transparent.