Annual Percentage Yield (APY)

What Is Annual Percentage Yield (APY)?

The annual percentage yield, or APY, is the rate of return on a savings deposit over a year that includes the effect of compounding. A plain nominal interest rate states the base rate but does not, by itself, reflect how often that interest is compounded and added back to the balance. APY folds that compounding in, so it captures the interest earned on interest across the year and typically comes out slightly higher than the matching nominal rate. Because all else equal more frequent compounding raises the effective rate, an account compounding daily shows a higher APY than one compounding annually at the same nominal rate. APY is the deposit-side counterpart to the annual percentage rate used to describe the cost of borrowing.

Why It Matters

APY exists so savers can compare deposit accounts on a consistent, compounding-aware basis rather than being misled by nominal rates alone. Since two accounts can share a nominal rate yet compound at different frequencies, the one that compounds more often produces more actual interest, and APY makes that difference visible in a single number. This is why APY is a standardized disclosure on many savings products. The concept reinforces the broader lesson that compounding frequency, not just the headline rate, shapes real outcomes. It also mirrors the borrowing side, where APR describes cost: comparing APY on savings with APR on debt clarifies the gap households often face between what idle cash earns and what carried balances cost, without prescribing any particular course of action.