Worked example
A 4% rate compounded monthly is an APY of 4.074%. Deposit $10,000 for 12 months and you earn $407, ending with $10,407.
- Deposit
- $10,000
- Interest rate (APR)
- 4%
- APY with monthly compounding
- 4.074%
- Interest earned
- $407
- Ending balance
- $10,407
| Compounding | APY | Interest in 12 months | Ending balance |
|---|---|---|---|
| Monthly | 4.074% | $407 | $10,407 |
| Quarterly | 4.060% | $406 | $10,406 |
| Semiannually | 4.040% | $404 | $10,404 |
| Annually | 4.000% | $400 | $10,400 |
How APY is calculated
APY = (1 + r ÷ n)n − 1
Here r is the stated yearly rate as a decimal and n is the number of times interest is added in a year. The more often interest is added, the higher the APY, but the gain from monthly to daily is small.
APY or APR?
APR is the stated rate. APY includes compounding. Banks must quote APY on deposit accounts, so use it to compare savings accounts and certificates of deposit. Loans are the other way around: you compare them by APR.
Frequently asked questions
What is APY?
APY, the annual percentage yield, is the interest you actually earn in a year once compounding is counted. A 4% rate compounded monthly has an APY of 4.074%. A bank’s stated rate on its own, without compounding, is called the APR or nominal rate.
How do I convert APR to APY?
APY = (1 + APR ÷ n)^n − 1, where n is how many times a year interest is added. At 4% the APY is 4.074% with monthly compounding, 4.060% quarterly and 4.000% annually.
Does a higher APY always mean more money?
For the same deposit and term, yes. A rate of 5% compounded monthly has an APY of 5.116%, so $10,000 earns more than at 4%. Compare accounts by APY, not by the nominal rate, so each offer is measured the same way.
Is the APY on a savings account guaranteed?
Not usually. Savings and money market account rates are variable and can change at any time. A certificate of deposit locks its rate for the term. This calculator assumes the rate stays the same.
Is the interest taxable?
Interest is generally taxable in the year it is credited. The figures here are before tax and are an illustration, not investment, tax or legal advice.