APY (Annual Percentage Yield)
The actual annualized return on a deposit account, taking compounding into account. Distinguishes meaningfully from "interest rate" only on accounts with intra-year compounding — which is virtually all US deposit accounts.
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APY is the metric required by the federal Truth in Savings Act (Regulation DD) for disclosure on US deposit products. The intent of the regulation is to let consumers compare deposit yields across banks and product types without having to do compound-interest math themselves. APY is calculated by the bank using a federally specified formula that assumes the stated nominal rate compounds throughout the year at the product's actual compounding frequency. For an account paying a 5.00% nominal rate compounded monthly, the APY is approximately 5.12%; for the same rate compounded daily, the APY is approximately 5.13%.
The practical significance of APY versus interest rate is small for short holding periods and at moderate rates, but it matters increasingly at longer horizons and higher rates. A $20,000 balance at 5.00% APY over 30 years grows to approximately $86,500 with annual compounding; at the same nominal rate compounded daily, it grows to approximately $89,600 — a difference of about 3.5% in terminal balance. For most US deposit accounts (HYSAs, money markets, CDs), the bank publishes the APY, not the underlying nominal rate, which is the right number to use for comparison. Always compare APYs across products, never nominal rates.
APY can also differ from a simple interest calculation in CD products, where some banks express the yield as a nominal rate to make the headline number look higher than the actual annualized return. The Truth in Savings Act requires the APY disclosure regardless, but the marketing rate can confuse less-attentive readers. The APY is always the right number; if the bank lists both, use the APY for the comparison.
One quirk worth noting: some banks publish promotional APY tiers that step down after an introductory period ("earn 5.00% APY for 3 months, then the standard rate"). The Truth in Savings Act requires disclosing both the promotional and post-promotional APY, but the standard rate can be much lower — sometimes 0.50% or less — and the math behind whether the promo is worth the application effort depends on what you do with the money after the promo ends. The honest math values the account at the weighted-average APY over your expected holding period, not the promotional headline.
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