What Is APY?
Annual Percentage Yield (APY) is the effective annual rate of return accounting for compound interest. It tells you exactly how much you'll earn in a year, making it easy to compare accounts with different compounding frequencies.
APY vs APR
APR (Annual Percentage Rate) is the nominal rate before compounding. APY includes the effect of compounding. A 5% APR compounded monthly gives a 5.116% APY. For savings, look at APY. For loans, look at APR — they work in opposite directions for your wallet.
How Compounding Frequency Affects APY
More frequent compounding produces higher APY. A 5% nominal rate yields: 5.000% APY (annual), 5.095% APY (quarterly), 5.116% APY (monthly), 5.127% APY (daily). The differences seem small but add up on large balances over time.