About this calculator
A 5.0% account that compounds daily pays 5.12% APY. Over decades that difference compounds into significantly more money, and it is the reason APY rather than interest rate is the number to compare when choosing between accounts.
How it works
APY is calculated by dividing the rate by the compounding frequency, adding one, raising it to that frequency, and subtracting one. The difference from the nominal rate is small at typical rates, but it is free money when the compounding is frequent.
Frequently asked questions
What is APY?
Annual Percentage Yield is the effective annual return on a deposit once compounding is included. It is the honest number for comparing accounts, because it already factors in how often interest is added.
How is APY different from interest rate?
The interest rate is the nominal figure before compounding. APY is what you actually earn over a year. A 5.0% rate compounded daily yields about 5.12% APY.
Does compounding frequency matter much?
Less than people expect at typical rates. Between monthly and daily compounding at 5%, the APY differs by only a few hundredths of a percent. The interest rate matters far more than the frequency.
Is a higher APY always better?
Not necessarily. Check for fees, minimum balance requirements, and whether the rate is promotional and will drop. A high APY with a monthly fee can be worse than a lower APY with no fees.
How is APY different from APR?
APY reflects what your money earns in a deposit account. APR on a loan or credit card includes interest plus fees, which is why a credit card APR is higher than its interest rate.
Do student loans compound daily?
Federal student loans use simple interest calculated daily, with interest capitalized each year. Payments are applied first to accrued interest, then to principal, so extra amounts above the monthly interest reduce principal directly.