What Is a APY Savings Account?

An APY savings account announces to the investor, up front, exactly how much they will be paid in interest over the course of one year. APY stands for Annual Percentage Yield and should not be confused with Annual Percentage Rate. The APY calculates how much an investment grows with interest compounding over the course of the year.

Features

A bank will always state the Annual Percentage Yield of a savings account along with its Annual Percentage Rate. The APY is always bigger than the APR. This is because the APY takes into consideration compound interest. The Annual Percentage Rate is the amount of interest the account pays over the course of one year. The Annual Percentage Yield is the amount that the account actually grows. If you want to know how much money will be in your savings account at the end of one year, look at the APY.

Types

APY is quoted on many types of savings accounts. These include interest bearing checking accounts, bank savings accounts, money market accounts and certificates of deposit. APY is not a term used for financial securities like stocks. They have share prices that fluctuate and some stocks pay dividends. They do not have interest rates so they do not have an APY.

Significance

The most significant factor that impacts APY is the frequency of compounding. Savings accounts usually compound interest quarterly, monthly or daily. The more frequently interest is compounded, the higher the APY. This is because more interest is being paid on interest that was previously earned. If two savings accounts have the same Annual Percentage Rate but one compounds monthly and one compounds daily, the one that compounds daily will have a higher APY.

Benefits

APY is used to compare the benefits of different savings accounts. This is because it considers variables like interest rate and frequency of compounding for you. APY is a bottom line figure that tells investors how much money the account will make for them. Banks often offer higher APY on savings accounts with higher minimum balances or have longer time commitments. These requirements are usually seen with Certificates of Deposit.

Identification

A formula identifies the APY of a savings account. The Annual Percentage Rate is divided by the number of compounding periods there are in one year. Divide by 4 for quarterly compounding, divide by 12 for monthly compounding and divide by 365 for daily compounding. Add the number 1 to the total then multiply it exponentially by the number of compounding periods. Subtract the number 1 from that total to get the APY.