What does APY stand for? It stands for annual percentage yield, the total amount of interest a deposit earns in one year, shown as a percentage and including the effect of compounding. You see it on savings accounts, money market accounts and certificates of deposit, often in large type next to the word "rate."
APY answers a practical question: if I leave this money here for a year, how much will it grow? Because it counts interest earned on earlier interest, the APY is usually a bit higher than the plain interest rate. That makes it the fairest number for comparing one savings account with another.
Quick facts
Stands for
Annual percentage yieldType
InitialismHow to say it
A P YUsed in
Savings accounts, CDs, money market accounts, bank adsIncludes
Compound interest over one yearCompare with
APR, which is used mostly for loansRequired by
US savings disclosure rules
What does APY stand for in banking?
| Letter | Stands for | Meaning for savers |
|---|---|---|
| A | Annual | Measured over one full year |
| P | Percentage | Given as a share of the balance |
| Y | Yield | What the money earns, including compounding |
US banks and credit unions are required to list the APY whenever they advertise interest on deposit accounts. A federal law, the Truth in Savings Act, set up these rules so savers can compare offers on the same footing.
How APY works, with an example
Interest can be added to an account daily, monthly or quarterly. Each time it is added, the next round of interest is figured on a slightly bigger balance. APY rolls all of that into one yearly figure.
A savings statement: You deposit 1,000 dollars in an account paying a 4.00 percent interest rate, compounded monthly. After a year you have about 1,040.74 dollars. The interest rate was 4.00 percent, but the APY is about 4.07 percent, because each month's interest also earned interest.
The formula is APY = (1 + r ÷ n) raised to the power n, minus 1, where r is the yearly interest rate as a decimal and n is how many times per year interest is compounded. You do not need to run it yourself; banks list the APY for you.
APY vs APR
The two look alike and are easy to mix up.
- APY, annual percentage yield: used for money you save. It includes compounding, and a higher APY is better for you.
- APR, annual percentage rate: used for money you borrow, such as credit cards and loans. In the United States it generally does not show the effect of compounding, and a lower APR is better for you.
A handy memory aid: Y for yield, what you earn; R for rate, what you are charged.
Reading APY in a bank ad
- Variable or fixed: a savings account's APY can change at any time. A CD's APY is usually locked for its term.
- Minimum balance: the top APY may only apply above a certain balance.
- Promotional rates: an intro APY may drop after a few months.
- Fees: a monthly fee can wipe out the interest on a small balance.
- Insurance: check that deposits are covered by the FDIC at a bank or by federal share insurance at a credit union.
APY stands for yield, so more is better
When two accounts are otherwise equal, the higher APY earns more. Comparing interest rates alone can mislead you if the accounts compound on different schedules; comparing APYs fixes that. APY also differs from ROI, return on investment, which measures gains on any investment and can include losses, while APY describes a deposit's set interest. The business acronyms hub lists more money terms.
Questions people ask
What does APY mean on a savings account?
It means the yearly percentage your balance earns, including compound interest. A 4.5 percent APY means about 4.5 dollars per year for every 100 dollars kept in the account, if the rate stays the same.
Is APY the same as interest rate?
Not quite. The interest rate is the base rate, while APY adds the effect of compounding. When interest compounds more than once a year, the APY is higher than the rate.
Is APY calculated monthly or yearly?
APY is a yearly figure. Interest may be added daily or monthly, but APY shows the combined result over a full year.
Can APY change?
Yes, on most savings and money market accounts the APY is variable and can change. Certificates of deposit usually lock the APY for the full term.
How do you pronounce APY?
Say each letter, A P Y. You pronounce the three letters separately, which makes APY an initialism.