What is the difference between APY and interest rate?

The interest rate is the nominal annual rate before compounding; APY includes the effect of compounding. At 5% compounded monthly the APY is 5.116%, so $10,000 earns $511.62 in a year instead of $500. APY is the figure to compare across accounts.

Is APY the same as APR?

No. APY measures what you earn and includes compounding; APR measures what a loan costs and includes fees but not compounding. A card at 24% APR compounded daily effectively costs about 27.1% a year, so the two are not directly comparable.

Does daily compounding make a big difference?

Less than most people expect. At 5%, monthly compounding yields 5.116% and daily 5.127% — a difference of about $1 a year on $10,000. The headline rate matters far more than how often it compounds.

APY Calculator

Convert a nominal rate into annual percentage yield at any compounding frequency.

Quick answer

Annual percentage yield is APY = (1 + r ÷ n)^n − 1, where r is the nominal annual rate and n is the number of compounding periods per year. APY includes compounding, so it is the only figure that compares savings accounts fairly — 5% compounded monthly is an APY of 5.116%.

Rate & compounding

Nominal interest rate

Compounding frequency

Deposit (optional)

Annual percentage yield

5.116%

Nominal rate

5.00%

Compounding boost

+0.116%

First-year interest

$511.62

If compounded continuously

5.127%

APY is the honest number

The nominal rate ignores compounding; APY includes it. The formula is APY = (1 + r/n)^n − 1, where r is the nominal annual rate as a decimal and n is how many times a year interest is credited. Because APY folds compounding in, it is the only figure that lets you compare two accounts fairly — which is exactly why U.S. regulation requires deposit accounts to advertise it.

Worked example: 5% compounded monthly

Monthly compounding divides the 5% into twelve credits of 0.4167%, each earning interest for the rest of the year. That gives (1 + 0.05/12)^12 − 1 = 5.116% APY, so $10,000 earns $511.62 in the first year rather than $500. Compounded daily the same 5% yields 5.127%; compounded annually it is exactly 5%. The gap widens as rates rise.

APY vs. APR

They answer opposite questions. APY describes what you earn and includes compounding. APR describes what a loan costs and includes fees but, by convention, not compounding — which is why a credit card quoting 24% APR compounded daily actually costs about 27.1% a year if you carry a balance. Never compare an APY on savings against an APR on debt as if they were the same unit.

Diminishing returns on frequency

Moving from annual to monthly compounding at 5% adds about 0.116 percentage points. Going from monthly to daily adds only 0.011 more, and continuous compounding — the mathematical ceiling, e^r − 1 — adds almost nothing beyond that. So compounding frequency is worth checking but rarely worth switching banks for: the headline rate matters far more.

What APY doesn't promise

A quoted APY assumes the rate holds for a full year and that interest stays in the account. Savings and money-market rates are variable and can change the day after you deposit, so only a fixed-term product like a CD really locks the yield in. Introductory rates that revert, balance caps above which the rate drops, and minimum-balance requirements all mean the APY you actually earn can be lower than the one advertised.

Frequently asked questions

What is the difference between APY and interest rate?: The interest rate is the nominal annual rate before compounding; APY includes the effect of compounding. At 5% compounded monthly the APY is 5.116%, so $10,000 earns $511.62 in a year instead of $500. APY is the figure to compare across accounts.
How do you calculate APY?: APY = (1 + r/n)^n − 1, where r is the nominal rate as a decimal and n is the number of compounding periods per year. For 5% compounded monthly: (1 + 0.05/12)^12 − 1 = 0.05116, or 5.116%.
Is APY the same as APR?: No. APY measures what you earn and includes compounding; APR measures what a loan costs and includes fees but not compounding. A card at 24% APR compounded daily effectively costs about 27.1% a year, so the two are not directly comparable.
Does daily compounding make a big difference?: Less than most people expect. At 5%, monthly compounding yields 5.116% and daily 5.127% — a difference of about $1 a year on $10,000. The headline rate matters far more than how often it compounds.

Sources & methodology