Glossary
APY (Annual Percentage Yield)
The effective annual return on a deposit account once compounding is included — the number that makes savings rates comparable.
APY — annual percentage yield — is what a deposit account actually pays you over a year once compounding is counted. A bank advertising a 4.5% rate compounded daily really pays about 4.60% — because each day’s interest starts earning its own interest the next day.
The formula: APY = (1 + r/m)ᵐ − 1, where r is the nominal rate and m is how many times a year the account compounds. More frequent compounding means a slightly higher APY for the same rate, which is why banks are required to publish APY — it neutralizes compounding as a marketing trick and makes accounts directly comparable.
Practical rules: compare savings accounts and CDs by APY only, never by the stated rate; and when the difference between two accounts’ APYs is more than about a quarter point, the higher one wins regardless of compounding schedule.
APY assumes the money stays put for a full year with no deposits or withdrawals. Your actual earnings on a fluctuating balance will differ slightly, but the ranking of accounts by APY still holds. The borrowing-side mirror of this concept is APR.
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