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.
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.
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.
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.