What is APY (Annual Percentage Yield)?

APY (Annual Percentage Yield) is the effective annual return on a US deposit account, expressed as a percentage that includes the effect of compounding within the year. It is the standard yield comparison number that banks and credit unions must disclose under the Truth in Savings Act (Regulation DD), and it is always at least as large as the nominal interest rate.

Detailed definition

APY is the US federal standard for advertising and disclosing the return on a deposit account. The Truth in Savings Act of 1991 created APY so consumers could compare a savings account paying 4.95 percent compounded daily with a CD paying 5.00 percent compounded monthly on the same scale. Regulation DD (12 CFR Part 1030) defines APY, prescribes its rounding (two decimals), and mandates its display on disclosures, statements, and ads. Credit unions follow the same rule under the National Credit Union Administration's Truth in Savings rule (12 CFR Part 707).

Mechanically, APY translates "rate plus compounding schedule" into a single yearly percentage. A 5 percent nominal rate compounded monthly does not pay 5 percent in a year because each month's interest is added to the balance and itself earns interest for the rest of the year. The compounded total works out to 5.12 percent of the starting balance, so the APY is 5.12 percent. Compounding daily lifts this to 5.127 percent; compounding continuously lifts it to 5.1271 percent. Past daily compounding the gains are essentially zero.

APY assumes the rate stays constant and the deposit stays in the account for a full year. Both assumptions break for variable-rate accounts: the published APY is a snapshot. A high-yield savings account showing 5.00 percent APY in May 2026 will show a different APY the moment the bank changes its underlying rate, with no notice required beyond a periodic statement.

Formula

APY  = (1 + r / n)^n - 1                     (discrete compounding)
APY  = e^r - 1                                (continuous compounding)
APY  = (1 + Interest earned / Principal)^(365 / Days in account) - 1   (Reg DD method when balance varies)

r = nominal annual rate (the "interest rate" the bank advertises before compounding).
n = compounding periods per year. Daily is 365 (some banks use 360); monthly is 12; quarterly is 4.
Interest earned = dollars of interest credited during the period. Used in the Reg DD APY Earned figure shown on statements.
e = 2.71828..., the natural log base. Continuous compounding is the upper bound; no bank pays more than e^r - 1.

Worked example (2026 high-yield savings account)

Suppose a 2026 high-yield savings account pays a 5.00 percent nominal rate with daily compounding on a $25,000 balance held for a full year.

Nominal rate (r): 5.00 percent.
Compounding periods (n): 365 (daily).
APY: (1 + 0.05 / 365)^365 - 1 = 5.127 percent.
Year-end balance: $25,000 x (1.05127) = $26,281.73.
Interest earned: $1,281.73 versus $1,250.00 at simple interest (a $31.73 compounding bonus).

Result: 5.00 percent nominal becomes 5.127 percent APY with daily compounding. On $25,000 held for a year that is $1,281.73 of interest, $31.73 more than simple interest. The same nominal rate compounded monthly would produce 5.116 percent APY (about $2.75 less per year).

APY vs APR vs interest rate

The same three letters trip up most savers. APR is the federal standard for loans; APY is the federal standard for deposits. They use different math because compounding works in opposite directions for borrowers and savers.

Metric	Includes compounding?	Used for	Disclosed under
Interest rate (nominal)	No	Computing month-by-month interest	Disclosed on the account agreement
APR (Annual Percentage Rate)	No (plus mandatory loan fees)	Comparing US loan offers	Regulation Z (12 CFR 1026)
APY (Annual Percentage Yield)	Yes	Comparing US deposit accounts	Regulation DD (12 CFR 1030)

Common pitfalls

Comparing nominal rate to APY. Two banks advertising "5.00 percent" are not the same if one quotes the nominal rate and the other the APY. Always compare APY to APY.
Assuming variable APY is locked. High-yield savings APY can drop the day after you fund the account. CDs are the only category that locks the APY for the full term.
Ignoring promotional vs ongoing rate. Some accounts pay a teaser APY for 3 to 6 months, then drop to a much lower ongoing APY. Read the fine print or check the bank's rate history.
Forgetting taxes. Interest is taxed as ordinary income on Form 1099-INT. A 5.127 percent APY is roughly 3.8 percent after federal tax at a 25 percent marginal bracket, and less again after state tax.
Tiered APY rules. Some accounts pay the headline APY only on balances above (or below) a threshold. Check whether the quoted APY applies to your actual balance.
Compounding above daily. "Continuous compounding" sounds impressive but adds essentially nothing past daily at normal deposit rates. Do not pay for a brand premium based on it.

Related calculators on 3Tej

Plug your own nominal rate, compounding schedule, and balance into one of these free calculators to model your real yield:

APY Calculator APR Calculator Compound Interest Calculator Savings Calculator CD Calculator

Frequently asked questions

What is the difference between APY and interest rate?

The interest rate (nominal rate) is the simple yearly rate before compounding. APY is the effective yearly rate after compounding is applied. At 5.00 percent nominal compounded monthly the APY is 5.12 percent; compounded daily it is 5.13 percent. US banks must quote APY on deposit ads and statements under Regulation DD (12 CFR 1030).

How do I calculate APY from APR?

Use APY = (1 + APR / n)^n - 1, where n is the number of compounding periods per year. At a 5.00 percent APR: monthly compounding gives APY = (1 + 0.05/12)^12 - 1 = 5.12 percent. Daily compounding gives APY = (1 + 0.05/365)^365 - 1 = 5.127 percent. Continuous compounding gives APY = e^0.05 - 1 = 5.127 percent (the practical ceiling).

Why is APY higher than the interest rate?

Because compounding within the year reinvests already-earned interest at the same rate, so the effective yield exceeds the simple yearly rate. At a 5 percent annual rate, $10,000 earns $500 with no compounding but about $512 with monthly compounding because each month's interest then earns interest for the rest of the year.

Does APY change?

On a fixed-rate CD, the APY locks for the term. On a high-yield savings account, money market account, or interest checking account, the APY is variable: the bank can change the underlying rate at any time, and the APY will shift with it. Always confirm the current APY rather than relying on advertised rates that may be stale.

Is APY the same as compound interest?

Not the same; APY is one application of it. Compound interest is the general concept that interest earned itself earns interest. APY is the federally defined, standardised yearly number that turns any compounding schedule into a single percentage so deposit accounts can be compared on equal footing.

What is a good APY in 2026?

For a US high-yield savings account, top APYs typically track within 0.5 percentage points of the Federal Reserve's upper target. CDs at top online banks usually pay a small premium for term commitment. Compare the FDIC's national rate cap (currently published monthly) and shop online banks; the gap between a brick-and-mortar savings account and a top HYSA is often 4 percentage points or more.

Sources and further reading

Consumer Financial Protection Bureau, Regulation DD - Truth in Savings (12 CFR Part 1030).
CFPB, What is the difference between an interest rate and the APY on a deposit account?.
FDIC, National Rates and Rate Caps - monthly average deposit rates.
National Credit Union Administration, Truth in Savings Rule (12 CFR Part 707) - the credit union equivalent of Regulation DD.
Truth in Savings Act of 1991 (12 USC 4301 et seq.) - statutory authority for APY disclosure.

Last updated 2026-05-28.