APY vs Interest Rate: What Actually Pays You
A bank's stated interest rate and its APY are two different numbers, and the gap between them is entirely compounding. The interest rate is the base annual percentage before compounding gets applied. APY, annual percentage yield, is what you actually earn in a year once it does. When you're comparing accounts, APY is the number that matters, because it's the one number every bank has to calculate the same way.
The two numbers, defined
Interest rate (also called the nominal or stated rate) is the raw annual percentage a bank quotes before compounding: "5% APR" or "5% interest." On its own, it doesn't tell you how often that rate gets applied to your balance.
APY is the interest rate plus the effect of compounding, expressed as what you'd actually earn over one year. U.S. banks and credit unions are required to disclose APY under the Truth in Savings Act (Regulation DD), which defines it as "a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate and the frequency of compounding during a 365-day period." That's a regulatory requirement, not a marketing choice, which is why every bank calculates it the same way.
The formula that connects them
r is the stated annual interest rate as a decimal, and n is how many times per year it compounds. This is the same compounding math behind the compound interest formula, just measured over exactly one year so it produces a single comparable number.
Annual percentage yield (APY)
A 5% rate compounded monthly yields 5.12% over a year.
Try 5% at different frequencies and watch how little the frequency itself moves the number. That gap is real, but it's usually a rounding error next to the difference between two banks' actual rates.
How much does compounding frequency actually matter?
Less than most people expect. Here's 5% at every common frequency:
| Frequency | n | APY |
|---|
Going from annual to monthly compounding moves the APY by about 0.10 percentage points at a 5% rate. Going from monthly to daily moves it by about 0.001 points, effectively nothing. If two accounts show a meaningfully different APY, the difference is almost always the underlying rate the bank is paying, not how often it compounds.
Where this actually causes mistakes
The mistake isn't misunderstanding either number on its own. It's mixing them: taking a bank's advertised APY and running it back through a periodic-rate calculation as if it were the stated rate, which double-counts the compounding that's already baked in. If a bank quotes 5.12% APY, that's already the annual answer. Compare it directly to another bank's APY, not to a stated rate, and don't feed it into the compound interest formula a second time.
Quick check: if you're ever unsure whether a number you're looking at is a stated rate or an APY, look for how it's labeled. Regulation DD requires "annual percentage yield" or "APY" specifically when that's what's being disclosed, so the label is not optional marketing language.
Written by Cedrick Reese. The APY formula and the Truth in Savings Act disclosure requirement are checked against the Federal Reserve's Regulation DD consumer compliance guide, and the conversion table above is computed live from the formula by this page's own code rather than transcribed. Last reviewed: September 19, 2026.
Frequently asked questions
Is APY the same thing as interest rate?
No. The interest rate (sometimes called the nominal or stated rate) is the base annual percentage before compounding is applied. APY, annual percentage yield, is what you actually earn in a year once compounding is factored in, so APY is always equal to or higher than the stated rate.
Why do two accounts with the same interest rate show different APYs?
Because they compound on a different schedule. The same 5% stated rate produces a higher APY compounded daily than compounded monthly, since daily compounding applies the rate in smaller, more frequent slices. The gap is real but small at typical savings rates, as the table above shows.
Which number should I compare when shopping for a savings account?
APY. It already accounts for each bank's compounding frequency, so comparing APY to APY is an apples-to-apples comparison. Comparing stated interest rates alone can be misleading if the banks compound on different schedules.