APY — Annual Percentage Yield — is the real annual return on a savings account, CD, or money market account after compounding is applied. Unlike APR (Annual Percentage Rate), which states the base interest rate without accounting for how often interest is added to your balance, APY reflects what you actually earn over a full year.
The gap between APY and APR widens the more frequently interest compounds. A 5.00% APR compounded daily produces an APY of 5.127% — not 5.000%. On a $100,000 balance that difference is $127 in a single year. Over multiple years the divergence grows significantly.
Banks advertising savings accounts and CDs are legally required by the Truth in Savings Act to disclose APY. Always compare APY to APY across accounts — never mix APR from one bank with APY from another.
When should I use APR → APY vs. APY → APR conversion?
Use APR → APY when a lender quotes you a nominal rate and you want to know your true annual yield. Use APY → APR when you want to reverse-engineer the underlying rate a bank is using to construct their advertised APY.
Does higher APY always mean a better account?
Usually — but check the minimum balance requirements, fees, and withdrawal restrictions. A 4.50% APY account with a $10,000 minimum and monthly fees may net less than a 4.20% APY account with no minimums.
How does compounding frequency affect APY?
The more frequently interest compounds, the higher the APY for the same APR. Daily compounding produces a slightly higher APY than monthly, which beats quarterly. The difference is small at low rates but meaningful on large balances or long time horizons.
Is APY the same as interest rate?
No. The interest rate (APR) is the base rate before compounding. APY is what that rate actually produces over a full year once compounding is factored in. For savings products, APY is always the more useful figure.