Finance term
APY (Annual Percentage Yield)
Also known as: annual percentage yield
Definition
APY (Annual Percentage Yield) is the effective annual return on a deposit account, factoring in the impact of compound interest. Always slightly higher than the simple interest rate for accounts with compounding.
Detailed explanation
APY is the standardized deposit-yield disclosure required by the Truth in Savings Act (TISA). Unlike APR (used for loans), APY factors in compounding — daily, monthly, or quarterly compounding produces a higher APY than the simple interest rate.
Formula: APY = (1 + r/n)^n - 1, where r is the simple annual rate and n is the number of compounding periods per year. With daily compounding (n = 365), a 4.30% simple interest rate produces a 4.39% APY.
For most online high-yield savings accounts (Marcus, Ally, Discover, SoFi), the APY is the rate they advertise and compound daily. Big-bank savings accounts typically have lower simple interest rates with monthly compounding, producing the headline-low APYs (often 0.01-0.40%) on those accounts.
APY changes with the federal funds rate. When the Fed raises rates, online HYSA APYs typically rise within weeks. When the Fed cuts, they come down quickly. Big-bank savings APYs barely move with Fed changes.
The FDIC's Truth in Savings regulations (12 CFR Part 1030, https://www.fdic.gov/regulations/laws/rules/6500-3550.html) require banks to disclose APY on all deposit account advertising and account statements. The CFPB's consumer deposit account guide (https://www.consumerfinance.gov/consumer-tools/bank-accounts/) explains how to compare APY across savings, money market, and CD accounts.
◈ Worked example
- 4.30% simple interest, daily compounding → 4.39% APY
- Big bank 0.01% interest → 0.01% APY (no meaningful compounding lift at that level)
- 5.00% interest, monthly compounding → 5.12% APY
Common questions
The most-asked questions about APY (Annual Percentage Yield) — answered straightforwardly.
What's the difference between APY and interest rate? +
Interest rate is the simple percentage. APY factors in compounding — the effective annual return after interest-on-interest compounds. For savings accounts with daily compounding, APY is slightly higher than the stated interest rate.
Why is APY higher than the interest rate? +
Compounding. With monthly or daily compounding, the interest earned in earlier periods itself earns interest in later periods. APY captures this. A 4.30% rate with daily compounding effectively yields 4.39% APY.
Further reading
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