APY vs interest rate
The interest rate (sometimes called the APR on savings) is the yearly rate before compounding. The APY, annual percentage yield, includes the interest you earn on your interest. U.S. banks must quote APY on deposit accounts, which makes it the fair way to compare them.
APY = (1 + rate ÷ n)^n − 1, where n is how many times a year interest compounds
Rate = n × ((1 + APY)^(1 ÷ n) − 1)
Worked example
A 4.5% rate compounded monthly gives an APY of 4.594%. On a $10,000 deposit that's $459.40 of interest in a year, or $9.40 more than 4.5% simple interest would pay.
Questions people ask
Is APY the same as APR?
No. APY includes compounding and is used for savings. APR is used for loans and cards and, for most credit, doesn't include compounding, so the true cost of a card balance is higher than its APR suggests.
Does daily compounding make a big difference?
Only a little compared with monthly: the table above shows the gap is a few dollars a year on $10,000. The rate itself matters far more.
How much will my savings earn over several years?
Use the savings interest calculator for monthly deposits over time, or the CD calculator for a fixed term.
Sources
- CFPB, Regulation DD (Truth in Savings), Appendix A: annual percentage yield calculation
- FDIC: deposit insurance
Reviewed September 26, 2026 by The Dollars World team. How we build and check our calculators · Our data and formulas. This is general information, not financial advice.