APY (Annual Percentage Yield)
The yearly return including compounding - the number to compare across savings, CDs and Treasuries.
The yearly return including compounding - the number to compare across savings, CDs and Treasuries.
APY answers one question: if you leave money untouched for a year, what does it become? It folds compounding into the rate, so an account paying 0.35% monthly is not 4.2% simple but about 4.28% APY - each month's interest itself earns interest. Because every US savings, CD and money-market product discloses APY, the figure is directly comparable across institutions without doing the math yourself.
The traps sit outside the headline. Promotional or teaser rates drop after an introductory window, some APYs require a minimum balance or a monthly direct deposit to earn at all, and rate ceilings cap the interest on large balances. Compare the ongoing APY with the same balance assumptions - and confirm the account is FDIC-insured where applicable - because a higher number that reverts in three months is not a higher number.
Worked example
$10,000 at 5.00% APY compounds to about $10,500 over twelve months if untouched; at 5.00% simple interest paid once a year the end point matches, but paid monthly the balance grows inside the year - which is exactly why APY exists as a single comparable figure.
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