This APY calculator converts a nominal interest rate (APR) and a compounding schedule into the annual percentage yield — the interest you actually earn in a year once compounding is included. Add an optional deposit and time horizon to project the balance.
APY exists because “5% interest” is ambiguous: 5% compounded daily earns more than 5% compounded annually, since each day’s interest starts earning its own interest. US banks are required by Regulation DD to advertise savings products using APY precisely so that accounts with different compounding schedules can be compared on one number.
The APY Formula
For a nominal annual rate r compounded n times per year:
APY = (1 + r/n)ⁿ − 1
For continuous compounding, APY = eʳ − 1.
Example at 5% nominal:
- Annually (n=1): APY = 5.000%
- Quarterly (n=4): APY = 5.095%
- Monthly (n=12): APY = 5.116%
- Daily (n=365): APY = 5.127%
- Continuously: APY = 5.127%
Notice the pattern: more frequent compounding always helps, but with rapidly diminishing returns — daily and continuous compounding differ by less than a thousandth of a percent.
APY vs. APR
The two acronyms answer opposite questions:
- APY (annual percentage yield) is what you EARN on deposits, with compounding included — banks quote it on savings accounts and CDs because it is the bigger-looking number
- APR (annual percentage rate) is what you PAY on loans, quoted without compounding of the rate itself but including certain fees — lenders quote it because regulation requires a comparable cost figure
The same 5% nominal rate is a 5.127% APY on a daily-compounding savings account. On a credit card, a 24% APR compounding daily works out to a 27.1% effective annual cost — the compounding that helps savers works against borrowers with equal force.
Using APY to Compare Accounts
Practical rules when shopping savings accounts and CDs:
- Compare APY to APY, never APY to APR — and check that a quoted “rate” is not the nominal rate dressed up
- Compounding frequency is already priced into APY, so you can ignore it once you have the APY number
- High-yield savings APYs float — the rate can change any day — while CD APYs are locked for the term
- Watch for minimum-balance tiers: an account advertising 5.00% APY may pay it only above a threshold
The difference compounds meaningfully: $10,000 for 5 years at 4.00% APY grows to about $12,167, while at 5.00% APY it reaches about $12,763 — nearly $600 more for one percentage point.
Frequently Asked Questions
What does APY mean?
Annual percentage yield — the real yearly return on a deposit once compounding is included. A 5% nominal rate compounded daily has a 5.127% APY, meaning $10,000 earns $512.67 in the first year, not $500. US banks must advertise deposit products by APY so accounts are directly comparable.
What is the difference between APY and interest rate?
The nominal interest rate is the raw annual figure before compounding; APY is the effective figure after it. They are equal only when interest compounds exactly once per year. The more frequently interest compounds, the more APY exceeds the nominal rate.
How much does compounding frequency actually matter?
Less than most people expect. At a 5% nominal rate, moving from annual to monthly compounding lifts the yield from 5.000% to 5.116%, but monthly to daily adds only 0.011% more, and daily to continuous is nearly nothing. Between two accounts, a higher APY beats a fancier compounding schedule every time — that is the point of the APY number.
Is APY guaranteed?
Only for fixed-rate products like CDs, where the APY is locked for the term. Savings account APYs are variable — they move with the Federal Reserve’s rate environment and can change without notice. Projections at today’s APY are estimates, not promises.
How do I calculate how much interest I will earn?
Multiply your balance by the APY for a one-year figure: $10,000 × 5.127% = $512.70. For multiple years, the balance compounds: FV = P × (1 + APY)ᵗ, so $10,000 at 5.127% APY for 5 years grows to about $12,840. This calculator does the multi-year math for you.