Banks advertise two numbers that sound alike and are not: the nominal interest rate, and the annual percentage yield. APY is the one that tells you what you will actually earn, because it folds in compounding.
How it works
Regulation DD sets the formula. Take the nominal rate, divide it by the number of times a year interest compounds, and grow it by that many periods. A 4% rate compounded monthly produces an APY of 4.074% — the extra 0.074 percentage points is the interest your interest earned.
Two accounts at the same rate can pay different amounts
This is the whole reason APY exists as a regulated figure. A 4% rate compounded daily beats a 4% rate compounded annually, so quoting the nominal rate alone lets two genuinely different offers look identical. Comparing advertised APY rather than the headline rate is the only like-for-like comparison, which is why Regulation DD requires banks to disclose it.
What this does not include
This projects a rate forward on the assumption that it holds and that the balance sits untouched. Savings rates are usually variable, so the APY quoted today is not a promise about next year. What a bank actually paid you over a period that has already happened is a different figure — annual percentage yield earned — and there is a separate calculator on this site for it.
How to use this calculator
- Enter the nominal annual rate the bank quotes.
- Pick how often interest compounds — the account disclosure states this.
- The result is the APY, which is what you should compare between banks.
Frequently asked questions
How much does compounding frequency actually matter?
Less than people expect at ordinary rates. At 4%, moving from annual to daily compounding takes the APY from 4.000% to about 4.081% — worth roughly $8 a year on $10,000. It matters more at higher rates and over longer periods, but it will rarely be the deciding factor between two accounts.
Is APY the same as APR?
No, and they are used in opposite settings. APY describes what you earn on deposits and includes compounding. APR describes what you pay on borrowing and, by convention, does not compound in the same way. Comparing one against the other is not a like-for-like comparison.
Why does my statement show a different rate?
Because the statement reports annual percentage yield earned — what was actually paid on your actual balance — rather than a projection. If your balance moved during the period the two will differ, and that is normal.
