APY definition
APY is defined in federal law as a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate and the frequency of compounding for a 365-day period.[1] The rules come from the Truth in Savings Act and its Regulation DD; credit unions follow the matching NCUA rule, where the interest is called dividends.
Two facts follow from the definition. First, APY already counts compounding, so a year at a given APY grows a balance by exactly that percentage. Second, every account's APY is computed the same way, which makes it the one number that compares offers fairly.
APY formula
For a rate r compounded n times a year, APY = (1 + r/n)n − 1. Regulation DD states the official version in terms of the interest actually earned over a term of any length:[2]
For a savings account the term is taken as 365 days, and the formula reduces to interest ÷ principal × 100. Regulation DD's own example: $61.68 of interest on $1,000 over a year is an APY of 6.17%. For a 182-day CD paying $30.37 on $1,000, the APY is 6.18%, because the half-year return is annualized with compounding. The APY calculator does either conversion.
APY vs interest rate
The interest rate is the yearly rate before compounding; APY is the result after compounding. The more often interest compounds, the further APY sits above the rate:[5]
| Compounding | APY | Interest earned |
|---|---|---|
| Annually | 4.500% | $450.00 |
| Quarterly | 4.577% | $457.65 |
| Monthly | 4.594% | $459.40 |
| Daily | 4.602% | $460.25 |
The gap between monthly and daily compounding is a few dollars a year; the gap between two banks' rates is usually far larger. Finance textbooks call the same quantity the effective annual rate (EAR).
APY vs APR
APY describes what you earn on deposits; APR describes what you pay on loans. Deposit accounts must disclose APY, along with the interest rate, any fees and, for CDs, the maturity date and early-withdrawal penalty.[3] Loans disclose an annual percentage rate (APR) that reflects the cost of credit including certain fees, and it does not show the effect of compounding. Seeing APR on a savings offer, or APY on a loan offer, is a sign to read the terms closely.
| APY | APR | |
|---|---|---|
| Used for | Savings, money market accounts, CDs | Loans and credit cards |
| Includes compounding | Yes | No |
| Higher number is better for you | Yes | No |
| Required by | Truth in Savings Act (Regulation DD) | Truth in Lending Act (Regulation Z) |
How APY works on CDs
On a CD the APY assumes you leave both the deposit and the interest in place until maturity. If interest is paid out monthly to another account, you earn the interest rate, not the APY. The CFPB recommends comparing CDs by rate, term and early-withdrawal penalty together.[4] A CD shorter than a year still quotes an annual figure: a 6-month CD at 4.00% APY earns about 2% over its term. The CD calculator turns any APY and term into dollars.
What is a good APY?
A good APY is one near the top of what insured accounts pay right now, and that changes with the Federal Reserve's policy rate. As a floor, the FDIC's national average savings rate was 0.38% and the average 12-month CD 1.76% (published October 19, 2026).[6] Many online banks pay several times those averages. The high yield savings account calculator shows what the difference is worth in dollars.
What APY does not tell youWhether the rate is promotional, whether it applies to your whole balance, and whether fees or minimums apply. Fees can make a high APY earn less than a lower one.
Related calculators
- APY calculatorAPR to APY and back, for any compounding
- CD calculatorValue at maturity from APY or rate, any term
- High yield savings account calculatorYour APY against the FDIC national average, in dollars
- How much interest will I earn?Interest per day, month and year on any balance, with tables
Frequently asked questions
What is APY in simple terms?
The percentage your money grows in a year in a deposit account, counting interest earned on interest. 4% APY on $1,000 means about $40 after a year.
Is APY the same as interest rate?
No. The interest rate leaves out compounding; APY includes it. A 4.50% rate compounded daily is 4.602% APY.
What is the difference between APY and APR?
APY is used for savings and includes compounding. APR is used for loans, reflects certain fees and leaves out compounding.
How is APY calculated?
APY = (1 + r/n)n − 1, where r is the interest rate and n the compounding periods per year. Going the other way, a 4.59% APY with monthly compounding is a 4.50% rate.
Does APY change?
On savings and money market accounts, yes: the bank can change a variable rate. On a fixed-rate CD the APY is locked until maturity.
Sources
- 12 CFR 1030.2, Definitions (Regulation DD, Truth in Savings)
- Appendix A to Part 1030 (Regulation DD), Annual Percentage Yield Calculation
- 12 CFR 1030.4, Account disclosures (Regulation DD)
- What is a certificate of deposit (CD)?
- Principles of Finance 2e, 8.4 Stated versus Effective Rates
- National Rates and Rate Caps, October 2026