What is APY (Annual Percentage Yield)?

Annual percentage yield (APY) is the standardized measure of total return on an interest-bearing deposit account over one year, assuming interest remains on deposit and compounds at the stated frequency. The formula is APY = (1 + r/n)ⁿ - 1, where r is the nominal annual interest rate and n is the number of compounding periods per year. Because compounding generates interest on previously credited interest, APY is always equal to or greater than the simple nominal rate. The more frequent the compounding, the higher the APY for any given nominal rate.

Under the Truth in Savings Act (Regulation DD), depository institutions must disclose the APY on all interest-bearing accounts. This requirement creates a uniform benchmark that permits direct, apples-to-apples comparison of deposit products regardless of differences in compounding frequency, crediting methods, or balance tiers. The regulation also governs how institutions may advertise APY, requiring that any statement of rate be accompanied by the APY and that deposit product advertisements not be misleading.

APY differs from annual percentage rate (APR), which measures borrowing cost. On the deposit side, APY represents what the depositor earns; on the credit side, APR represents what the borrower pays. Consumers comparing CDs, savings accounts, and money market accounts should use APY as the primary comparison figure, since it captures the full effect of compounding over the stated term.

When evaluating yield, savers must recognize the mathematical impact of compounding frequencies. For instance, a 5.00% nominal rate compounded daily yields a 5.13% APY ((n=365)), whereas monthly compounding yields 5.12% APY ((n=12)), and quarterly compounding yields 5.09% APY ((n=4)). Over decades or on large balances, these fractions of a percent compound into significant differences. Additionally, because APY is an annualized figure, investors must note that short-term products (such as a six-month CD stating a 5.00% APY) will not yield a 5% cash return on principal over their active term; the actual payout at maturity will be half of that annualized rate, since the funds were only held for half of the compounding year.