Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A nominal rate on its own can't be compared fairly across products that compound on different schedules, since a rate compounding daily delivers a slightly higher effective yield than the identical nominal rate compounding only annually. APY is what converts both onto the same effective basis so the actual better deal becomes visible.
Before you rely on it
What to check
Compare APY, not the nominal rate, across deposit products with different compounding frequencies, since the nominal rate alone can make two genuinely different products look identical.
The common error
Where people go wrong with APY calculator
Comparing two deposit products by their nominal interest rate alone. A daily-compounding account and an annually-compounding account at the identical nominal rate deliver different effective yields, and APY is the figure that actually reveals which one pays more.
Sensitivity evidence
How nominal annual rate changes the annual percentage yield
| Nominal annual rate | Annual percentage yield | Effective interest on $10,000 |
|---|---|---|
| 3.0% | 3.0% | $304 |
| 4.0% | 4.1% | $407 |
| 5.0%worked example | 5.1% | $512 |
| 6.0% | 6.2% | $617 |
| 7.0% | 7.2% | $723 |
Every input, tested
Which input moves the annual percentage yield most
| Input | Tested from | To | Annual percentage yield at each end | Swing |
|---|---|---|---|---|
| Nominal annual rate | 4.0% | 6.0% | 4.1% to 6.2% | 2.1% (41%) |
| Compounding periods | Annually | Daily | 5.0% to 5.1% | 0.127% (2.5%) |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Nominal annual rate | 5.0% |
| Compounding periods | Monthly |
| Annual percentage yield | 5.1% |
| Effective interest on $10,000 | $512 |
Where the inputs come from
Nominal annual rate is the stated rate without compounding, sometimes called the APR or interest rate on a bank's disclosure, and compounding periods per year is how often interest is added: 12 for monthly, 365 for daily, 4 for quarterly. The account agreement or the bank's rate sheet gives both. This tool converts them into the annual percentage yield that lets you compare accounts fairly, so use it when accounts are quoted differently.
When the result stops applying
Variable rates change, so the quoted APY is only what applies today. Promotional rates may apply only up to a balance cap or for a limited time. Fees can offset interest on small balances.
What to compare it with
See the result on a real deposit with the CD or savings growth calculators, and the continuous compounding page for the theoretical limit. The rule of 72 gives a quick doubling time. To go the other way and find the rate needed to hit a target, use the required interest rate calculator.
People also ask
Frequently asked questions
What is the difference between APR and APY?
APR is the nominal yearly rate without compounding, and APY includes compounding, so it shows the true return. For deposits, APY is the more useful comparison.
Does compounding daily beat compounding monthly?
Slightly. At 5%, daily compounding gives about 5.13% against 5.12% for monthly, a difference of a few cents per $1,000.
Is a bank's APY guaranteed?
Only for fixed products such as CDs. A savings account's APY can change at any time as the bank adjusts rates.