Saving & investing
APY: Definition, Formula and Example
APY is a deposit’s annual percentage yield, expressing one year of interest growth with compounding under stated assumptions.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Annual percentage yield; Effective annual yield.
How it works
A nominal rate alone does not specify the effect of compounding. Reinvesting interest more frequently raises the effective annual yield at the same positive nominal rate. U.S. disclosed APY follows Truth in Savings conventions, including timing assumptions; it is not an after-tax or inflation-adjusted return.
Effective annual yield = (1 + nominal annual rate / compounding periods per year)^periods per year − 1
This regular-period formula assumes a constant rate and reinvested interest. Actual disclosures may use exact days; fees and withdrawals can change what you earn.
5% nominal interest compounded monthly
Keep interest on deposit for one year.
- Monthly rate: 0.05 / 12.
- Effective annual yield: (1 + 0.05/12)^12 − 1 ≈ 0.0511619.
The effective annual yield is about 5.1162%, before tax and fees.
A fixed nominal annual rate; 12 equal compounding periods.
Try these example inputsAPY and APR answer different questions
APY describes deposit interest growth. Borrowing APR may include specified finance charges and follows different disclosure rules. Neither figure on its own tells you your real return after inflation.
Explore with a calculator
- Compound Interest Calculator
Convert compounding frequencies and inspect effective annual yield.
- CD Calculator
Project a CD with the rate and compounding assumptions you enter.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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