Learn — What is APY?

Definition

FACT. Annual percentage yield — APY — is a percentage rate that reflects the total amount of interest paid on an account, based on the interest rate and how often that interest is compounded, for a 365-day period. That is the definition in the Consumer Financial Protection Bureau’s Truth in Savings rule, Regulation DD, 12 CFR 1030.2(c), retrieved 2026-08-26.

Appendix A of the same rule says the same thing in one more clause: APY measures the total interest paid on an account from the interest rate and how often that interest is compounded. It is an annualized rate on a 365-day year. It reflects interest only. It does not include a bonus. It does not include earnings that depend on something that may or may not happen later.

In plain English: the interest rate is the annual rate the institution pays before compounding. APY is what that rate becomes over a year once compounding is built in. Two accounts can print the same interest rate and different APYs if they compound on different schedules.

Why it matters

FACT. Regulation DD exists so consumers can make informed decisions about deposit accounts and make meaningful comparisons among depository institutions (12 CFR 1030.1(b)). The Bureau’s own summary of the part says the rule helps consumers comparison-shop for savings accounts, checking accounts, money market accounts, certificates of deposit, and variable-rate accounts, and that institutions must disclose APY, interest rates, minimum-balance requirements, account-opening terms, and fee schedules.

The FDIC’s consumer deposit-account page says the Truth in Savings Act requires banks to disclose fees, interest rates, and other terms when an account is opened, upon request, and when terms change, so consumers can shop. A 2018 FDIC Consumer News piece is more specific: TISA requires a common method of disclosing the rate of interest earned — the annual percentage yield — so accounts can be compared across banks.

That is why a saver looking at two deposit products should line up APY against APY, not a raw interest rate against a different raw interest rate. The comparison number is the one the rule standardizes.

ANALYSIS. APY is a shopping tool, not a ranking of what anyone “should” hold. Liquidity, fees, minimums, and whether the money can be withdrawn without a penalty sit outside the yield figure.

How it works

The two rates on the disclosure

FACT. Account-opening disclosures must state both the “annual percentage yield” and the “interest rate,” using those terms (12 CFR 1030.4(b)(1)(i)). The interest rate is the annual rate of interest paid on an account that does not reflect compounding (12 CFR 1030.2(o)). If the two figures happen to be the same number, the institution may print one figure but must still use both terms.

If an advertisement states a rate of return, it must state that rate as an “annual percentage yield.” The abbreviation APY is allowed if the full term appears at least once. The advertisement may also state the “interest rate,” but not more conspicuously than the APY, and it may not state any other rate (12 CFR 1030.8(b)). An oral answer to a question about rates payable on accounts must state the APY; the interest rate may be added; no other rate may be stated (12 CFR 1030.3(e)).

The Bureau’s comment on deposit disclosures notes one naming trap. For the account disclosure, the interest rate may, but need not, also be referred to as the “annual percentage rate” in addition to “interest rate” (12 CFR 1030.2(o)). That optional label is still the deposit interest rate. It is not the credit-card or loan APR described later in this lesson.

Compounding is what turns a rate into a yield

Interest is a payment for the use of funds in the account, calculated by applying a periodic rate to the balance (12 CFR 1030.2(n)). Compounding adds earned interest to the balance so later interest is calculated on a larger amount. Crediting is when that interest is actually posted. Institutions must disclose how often they compound and how often they credit (12 CFR 1030.4(b)(2)(i)). The payment-of-interest rule does not require any particular compounding or crediting frequency (12 CFR 1030.7(b)). Daily, monthly, quarterly, or annual compounding are all permitted. APY is how those different clocks become one yearly number.

The formula the rule actually uses

FACT. For a typical savings or transaction account with no stated maturity, Appendix A assumes a 365-day term. In building the interest figure, the institution assumes that all principal and interest stay on deposit for the entire term and that no other deposits or withdrawals occur. When the term is 365 days, the simple formula is:

APY = 100 × (Interest / Principal)

“Principal” is the amount assumed to have been deposited at the start. “Interest” is the total dollar interest those funds would earn over the term. APY, the annual percentage yield earned on a periodic statement, and the interest rate are rounded to the nearest one-hundredth of one percentage point and shown to two decimal places (12 CFR 1030.3(f)(1)).

That assumption is the limit as much as it is the method. The advertised APY is not a prediction of what a person who adds and withdraws all year will earn. Periodic statements use a different figure — annual percentage yield earned — which annualizes the interest actually earned on the balances that were really in the account during the statement period (Appendix A, Part II).

Simple example

EXAMPLE. HYPOTHETICAL illustration. Not a current bank offer. Not a forecast. Not advice.

Take $1,000 left untouched for 365 days, with no other deposits or withdrawals — the Appendix A assumption.

Account A pays $40.00 of interest on that $1,000 over the year. Using the rule’s simple formula, APY = 100 × (40.00 / 1,000) = 4.00 percent. That is what a 4.00 percent interest rate looks like when interest is added only once, at year-end.
Account B pays $40.81 of interest on the same $1,000 because a 4.00 percent interest rate was compounded daily, so interest earned a little more interest. APY = 100 × (40.81 / 1,000) = 4.08 percent.

Same starting principal. Same stated 4.00 percent interest rate. Different compounding, different APY. The comparison a shopper is supposed to make is 4.00 percent APY against 4.08 percent APY, not “4 percent” against “4 percent.”

The Bureau’s own Appendix A illustration uses different classroom numbers and the same formula: $61.68 of interest on $1,000 for a 365-day NOW account produces a 6.17 percent APY. That 6.17 percent is a regulatory example, not a rate anyone is offering today.

Terms

Interest rate — the annual rate paid on the account that does not reflect compounding (12 CFR 1030.2(o)).
Compounding — adding earned interest to the balance so later interest is calculated on a larger amount. Frequency must be disclosed (12 CFR 1030.4(b)(2)).
Crediting — when accrued interest is posted to the account. Separate from compounding; also disclosed.
Principal — the funds assumed, for APY, to have been deposited at the beginning of the term (Appendix A).
Annual percentage yield (APY) — the standardized yearly interest figure that includes compounding (12 CFR 1030.2(c)).
Annual percentage yield earned — the backward-looking yearly rate on a periodic statement, based on interest actually earned and the average daily balance in that period (Appendix A, Part II).
Annual percentage rate (APR) — a yearly cost of borrowing. On a credit card, the CFPB says the interest rate is typically stated as an APR. On a loan, the CFPB says APR measures the interest rate plus additional fees charged with the loan.
Variable-rate account — an account whose interest rate may change after opening, unless the institution contracts to give at least 30 days’ written notice of decreases (12 CFR 1030.2(v)).
Stepped-rate / introductory rate — two or more rates that take effect in succeeding periods and are known when the account is opened (12 CFR 1030.2(s)). An introductory premium or discount on a variable account is calculated like a stepped-rate account (Appendix A, Part I.C).
Time account — an account with a maturity of at least seven days; the consumer generally cannot withdraw for six days after opening unless an early-withdrawal penalty of at least seven days’ interest applies (12 CFR 1030.2(u)). Certificates of deposit sit in this family.
Bonus — a premium, gift, or similar consideration worth more than $10 for opening, maintaining, renewing, or increasing a balance. Bonuses are not interest and are not built into APY (12 CFR 1030.2(f); Appendix A).
Tiered-rate account — different interest rates apply to specified balance levels (12 CFR 1030.2(t)). Each tier has its own APY.

Risks and limits

FACT — only what the primaries support.

The printed APY can change. On a variable-rate account, the institution must disclose that the interest rate and APY may change, how the rate is determined, how often it may change, and any cap or floor (12 CFR 1030.4(b)(1)(ii)). Advertisements that state APY on a variable account must say the rate may change after the account is opened (12 CFR 1030.8(c)(1)). A later change in a variable rate does not require the 30-day advance change-in-terms notice that applies to other adverse changes (12 CFR 1030.5(a)(2)(i)).

An introductory APY is not the ongoing APY. For a variable account with an introductory premium or discount, Appendix A requires the institution to treat the intro period as a step, then assume the ordinary variable rate for the rest of the year. The single APY on the disclosure is a blend, not a promise that the teaser continues.

Fees can reduce what a saver keeps. Advertisements that state APY must, when applicable, say that fees could reduce the earnings on the account (12 CFR 1030.8(c)(5)). Fees are disclosed separately from APY (12 CFR 1030.4(b)(4)) — maintenance fees, account-opening or closing fees, deposit and withdrawal fees. APY is a pre-fee interest figure. A monthly service charge can erase the interest on a small balance.

APY assumes the money stays put. Appendix A’s interest figure assumes principal and interest remain on deposit for the term and that no other transactions occur. Withdrawals, a closed account before interest is credited, or a balance that falls below the minimum can produce a different result. If consumers forfeit interest by closing before the crediting date, that fact must be disclosed (12 CFR 1030.4(b)(2)(ii)).

Minimums and tiers gate the advertised number. Disclosures and advertisements must state any minimum balance required to obtain the advertised APY, and any higher minimum to open the account (12 CFR 1030.4(b)(3); 12 CFR 1030.8(c)(3)–(4)). Below the minimum, the advertised yield is not the yield that applies.

The APY in an ad is dated. An advertisement that states APY must give the period the yield will be offered, or state that it is accurate as of a specified date (12 CFR 1030.8(c)(2)). It is a snapshot, not a lock.

Time accounts trade yield for access. The FDIC describes a CD as money that typically must stay deposited for a set term — often three months to five years or more — or the holder will likely pay a penalty or lose some or all of the interest. Regulation DD requires a statement that a penalty will or may be imposed for early withdrawal (12 CFR 1030.4(b)(6)(ii)). If interest may be withdrawn before maturity on a compounding time account, the disclosure must say the APY assumes interest remains on deposit until maturity and that a withdrawal will reduce earnings (12 CFR 1030.4(b)(6)(iii)). FDIC Consumer News notes that APY does not compare early-withdrawal penalties.

Bonuses are outside the yield. Appendix A is explicit: APY reflects only interest.

Who the rule covers. Regulation DD applies to depository institutions except credit unions (12 CFR 1030.1(c)). This lesson does not describe the parallel credit-union rule.

What this page does not do

Give individualized advice or name a bank, a product, or a current market rate
Present any sample rate as a live offer; classroom figures are labeled hypothetical or as Appendix A illustrations
Write the credit-card lesson or the FDIC-insurance lesson
Copy a bank marketing page
Apply Regulation DD to credit unions

Misconceptions

“APY is the same thing as APR.” It is not. APY is a Truth in Savings yield on a deposit. APR is a Truth in Lending cost of credit. The CFPB’s credit-card explainer: a card’s interest rate is the price paid for borrowing, typically stated as an annual percentage rate. The CFPB’s loan explainer: APR is the interest rate plus additional fees charged with the loan. One number describes what a deposit pays. The other describes what borrowing costs. Comparing a savings APY to a card APR as if they were one scale is a category error.

“The highest APY is the best account.” ANALYSIS, from facts above. The rule standardizes the interest figure. It does not net out fees, and it does not score liquidity. A higher APY with a large minimum, a monthly fee, or a CD penalty can leave a person worse off than a lower APY on money they can reach. FDIC Consumer News says to compare APYs and to understand the restrictions.

“The APY I saw is guaranteed for the year.” Not on a variable savings account. The rate may change after opening, and those changes do not get the 30-day adverse-change mailing. Even a fixed-rate time account’s APY is the yield for that contract’s term and assumptions, not a forecast of the next CD.

“If the interest rate and the APY match, compounding does not exist.” They match when compounding does not add extra interest over the year — for example, interest compounded and paid once at year-end on a 365-day account. They diverge when compounding during the year produces more total interest. Both presentations are lawful. The APY is still the comparison number.

“The APY on my statement should match the poster.” Advertised APY is a forward illustration under Appendix A’s assumptions. Annual percentage yield earned on a statement is a backward annualization of interest actually earned on the balances that were there. Deposits, withdrawals, and days below a minimum will move the two figures apart.

“A bonus means the APY is even higher than printed.” The bonus is disclosed separately. It is not folded into APY.

A savings account, a money market deposit account, and a CD can all carry an APY. The FDIC’s consumer page distinguishes them by use and access: savings for money not needed regularly; CDs for a set term with a likely penalty if broken; money market deposit accounts usually with a higher minimum and no required term. Money market mutual funds are a different object and are not FDIC-insured — the 2018 Consumer News piece draws that line. This lesson does not expand those products.