What is Annual Percentage Yield (APY)?

APY is an abbreviation for “annual percentage yield,” which is the percentage that indicates how much interest a bank account, such as a certificate of deposit (CD) or a high-yield savings account, earns in one year. The higher the APY, the more you earn. Unlike a simple interest rate, however, APY factors in compounding.

Here’s all that you need to know about the meaning of APY and how to know how much your account is paying you.

What does APY mean?

APY is a key feature to consider when shopping for a place to stash your savings. Some checking accounts also pay interest, too, although not much.

An APY includes the effect of compound interest, which is when both your principal and the accumulated interest earn interest. Compounding helps your cash grow faster than simple interest, which pays interest only on the principal.

Interest on an account can compound yearly, monthly, quarterly or daily. Accounts that compound more frequently generally earn more because the interest is computed and added to your account more often.

That’s why it’s important to consider APY — and not just the interest rate — when looking for a bank account. Comparing APYs helps you see how accounts stack up against each other.

What’s a typical APY?

Account APYs can differ dramatically, depending on the financial institution and the product. For example:

• The checking accounts with the highest yields pay up to 4.62 percent APY as of February 2025, while other checking accounts pay nominal to zero interest. The average rate for an interest-checking account was just 0.07 percent, as of January 2025, according to the FDIC. No matter how many times you compound that interest, your return isn’t going to be anything to write home about.
• The national average for a savings account is only 0.41 percent, as of January 2025, according to the FDIC,  But currently, the best savings accounts pay around 4.50 percent APY.
• The average interest rate on a one-year CD is 1.82 percent, as of January 2025, according to the FDIC. But if you shop around, you can currently find one-year CDs that pay close to 4.50 percent APY or higher.

Your product choice can make a difference to your earnings. You can use Bankrate’s CD calculator to compare earnings.

APY formula

To calculate APY, the formula is:

APY = ( 1 + ^r ⁄ _n ) ⁿ – 1

The “r” variable is the annual interest rate in decimal form (so 5 percent would be 0.05). The “n” variable is the number of compounding periods per year.

As an example, suppose you have a savings account with a 5 percent simple interest rate, compounded monthly (12 times in a year). You’d plug the following numbers into the formula:

Using a calculator to do the math, you get an APY of 0.0512, or 5.12 percent. If you would rather not plug in variables and percentages, Bankrate’s Compound Interest Calculator offers an easier way to determine APY.

Using APY to compare accounts instead of interest rates

If you solely focus on the interest rate, it can be easy to assume that your earning potential will be the same across different accounts. However, the compounding frequency – that other factor that helps determine the APY – is a critical piece of the puzzle. Consider the different earnings from three accounts with the same rate below:

Now, take a look at how the math adds up over five years.

The lesson is simple: The more compounding, the higher your APY. The higher your APY, the more money you’ll have. As you look for places to deposit your money, the APY – not the interest rate – should be one of the most influential factors.

How can you find the APY for an account?

Thanks to a federal law called the Truth in Savings Act (Federal Reserve Regulation DD), financial institutions must disclose to customers the account APY and the frequency of compounding, among other details.

This information can usually be found on bank websites.

If you want to figure out how much you might earn on an account given its APY, you can use Bankrate’s savings calculator. Say, for example, you want to put $1,000 into a savings account that earns 5 percent APY, and you plan to contribute $200 a month for two years. You’ll earn $334 in interest and have a balance of $6,134 at the end of two years.

APY vs. APR: The difference between the two

While APY represents how much interest you’ll earn on an account, APR, which stands for “annual percentage rate,” represents the annual cost to borrow money.

The APR is an important consideration when shopping for home loans, personal loans, car loans or credit cards.

For example, when you buy a house, the lender might offer an appealing mortgage rate, but it’s the APR that will tell you how much the loan will actually cost because rolled into that percentage is the interest, plus any points and fees the lender might charge.

Essentially, APY and APR are opposites: APY indicates how much you earn by saving money, while APR indicates how much you pay by borrowing money.

Is APY variable?

APYs can be fixed or variable, depending on the type of account you open. For example, a typical CD account pays a fixed rate for a specific term, such as one year or five years. Savings accounts and checking accounts, on the other hand, pay variable APYs, which means the rate can fluctuate. The rate you get when you sign up might move up and down over time.

A key factor affecting APYs — and APRs — is what the Federal Reserve does with the federal funds rate.

When the Fed raises the federal funds rate, it increases the cost of borrowing money in the economy. In response, banks and other financial institutions raise the APRs of their credit products. But they also respond by raising their APYs to incentivize savers to open (and keep) deposit accounts with them.

Thus, while high rates are discouraging news for people trying to snag a low APR on a credit card or other loan, federal funds rate hikes are usually a boon for savers because banks typically increase their APYs when the Fed raises the benchmark rate.

Bottom line

The APY on your bank or investment account tells you how much interest you will earn, factoring in the frequency of compounding. The power of compounding interest is that you’re not earning interest only on the cash you deposit; you earn interest on accumulated interest, which can grow your balance exponentially.

APY isn’t the only factor you should consider when shopping for a new account. Inquire about bank fees, such as monthly maintenance fees and administrative fees, because they can erode your earnings.

Be sure to know the APY and read the fine print on the account to understand the full cost of the product before signing up.