APY formula
r is the nominal annual rate as a decimal and n is the number of compounding periods per year. With continuous compounding the formula becomes:
Example
A 5% rate compounded daily gives (1 + 0.05/365)^365 − 1 = 5.1267% APY. On a $10,000 deposit that’s $512.67 of interest in a year, instead of $500 with simple annual interest.
APY vs. APR
APR (or the “interest rate”) ignores compounding within the year; APY includes it. Under the Truth in Savings Act, US banks must show APY on deposit accounts, so you can compare savings accounts and CDs on equal terms. Loans are quoted in APR, which makes them look a little cheaper than their compounded cost.
Does compounding frequency matter much?
Less than you might think. Moving from monthly to daily compounding at 5% adds about 0.01 percentage points. The rate itself — and how long you leave the money — matters far more. Use the table above to compare frequencies.
Related Savings & Yield Compounding Tools
Maximizing effective annual yields is fundamental to disciplined wealth accumulation. Compare fixed-term deposit rates with our CD Calculator, model long-term portfolio accumulation via the Compound Interest Calculator, track liquid cash milestones using the Savings Calculator, and evaluate borrowing APR with the APR Calculator.
Frequently asked questions
Is a higher APY always better?
For deposits, yes, as long as the terms are comparable. Check for minimum balances, monthly fees and introductory rates that drop after a few months.
Can APY change?
On savings and money market accounts, yes — banks can change the rate at any time. A CD's APY is fixed for its term.
How do I convert APY back to an interest rate?
Rearrange the formula: r = n × [(1 + APY)^(1/n) − 1]. For example, a 5% APY compounded monthly corresponds to a 4.889% nominal rate.