Annual Percentage Yield (APY)
What Is Annual Percentage Yield (APY)?
Annual Percentage Yield (APY) is the total amount of interest you earn on a deposit account over one year — including the effect of compounding.
Unlike APR, which measures borrowing cost, APY measures earnings.
The higher the APY, the more your money grows.
APY vs. Interest Rate
- Interest Rate → Basic rate paid on deposits
- APY → Interest rate plus compounding effect
Compounding means you earn interest on both your original deposit and previously earned interest.
Banks and credit unions are required to disclose APY clearly under regulations overseen by the National Credit Union Administration and similar agencies.
Why APY Matters
When comparing:
- Savings accounts
- Certificates of Deposit (CDs)
- Money market accounts
APY gives you the true growth rate.
Two accounts may advertise the same interest rate but different compounding frequencies — leading to different APYs.
Real-Life Example
If you deposit $10,000 into a savings account with:
- 4.00% interest rate
- 4.08% APY
That difference reflects compounding.
Over time, compounding significantly increases growth.
FAQs About APY
Is higher APY always better?
Generally yes, but review fees and account requirements.
Does APY change?
Yes, especially in variable-rate savings accounts.
Do checking accounts have APY?
Some interest-bearing checking accounts do.
Is APY guaranteed?
Fixed-rate CDs lock APY for the term. Savings accounts may change.
Related Terms
