APY (Annual Percentage Yield)
Definition
The effective annual rate of return on a deposit or investment that accounts for compound interest, showing the real rate you earn when interest is reinvested over a year.
APY represents the actual return you earn on a savings account, CD, or other deposit when compounding is factored in. Unlike APR (which shows the simple interest rate), APY includes the effect of interest earning interest throughout the year, making it a more accurate measure of what you'll actually earn.
The formula is: APY = (1 + r/n)^n - 1, where r is the stated annual rate and n is the number of compounding periods per year. A savings account with a 5.00% APR compounding daily has an APY of 5.13% — the extra 0.13% comes from daily compounding.
APY is required by the Truth in Savings Act for banks to disclose on deposit products, making it the standard comparison metric. When shopping for high-yield savings accounts, always compare APY rather than APR. Banks may advertise the higher-sounding APY or the lower APR depending on what looks more favorable.
Current high-yield savings accounts offer 4-5% APY (as of 2025), a dramatic improvement from the 0.01-0.50% that was common during the low-rate era of 2009-2022. Online banks typically offer the highest rates because they have lower overhead than traditional brick-and-mortar banks.
For crypto investors, APY is also used to describe staking rewards and DeFi yields. However, crypto APY often comes with different risks than bank deposits — there's no FDIC insurance, yields can fluctuate, and the underlying asset's price volatility can dwarf the yield earned.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
What's the difference between APY and APR?
APR is the stated annual interest rate without accounting for compounding. APY includes the effect of compounding, showing your true annual return. For deposits (savings, CDs), APY is always equal to or higher than APR. The difference grows with more frequent compounding.
What's a good APY for a savings account?
As of 2025, competitive high-yield savings accounts offer 4-5% APY. Traditional banks may offer as low as 0.01%. Always compare rates from online banks, which consistently offer the best APYs due to lower overhead costs.