Banking

What is APY (Annual Percentage Yield)?

APY is the real annual return on a savings account, including the effect of compounding interest. It’s the number you should compare across accounts. Under Regulation DD (the Truth in Savings Act), banks are legally required to disclose the APY for deposit accounts to allow consumers to make direct comparisons between institutions. The APY is always equal to or higher than the nominal interest rate because it accounts for compounding frequency.

The formula for APY is (1 + r/n)^n - 1, where r is the nominal interest rate and n is the number of compounding periods per year. The more frequently interest is compounded, the higher the APY.

Quick Facts

Legal MandateDisclosed under Regulation DD (Truth in Savings)

Nominal DifferenceAccounts for compounding, making it higher than nominal rate

Compounding ImpactDaily compounding yielding higher APY than monthly

Standard FormulaAPY = (1 + Interest Rate/Compounding Periods)^Periods - 1

PRACTICAL EXAMPLE

A bank offers a savings account with a 4.0% nominal interest rate. If compounded monthly, the APY is 4.07%. If compounded daily, the APY rises to 4.08%. Under Regulation DD, the bank must display the 4.08% APY to the consumer.

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Learn More Key Concepts

Savings AccountAn interest-bearing deposit account held at a financial institution, designed for accumulating funds with high liquidity.

CD (Certificate of Deposit)A time deposit product offering a fixed interest rate for a specific term, subject to penalties for early withdrawal.

High-Yield Savings AccountA savings account offering an interest rate significantly higher than the national average, often offered by online banks.

Compound Interest (Banking)Interest calculated on both the initial principal and the accumulated interest from previous periods in a deposit account.

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