APY calculator
Convert an advertised nominal rate into the yield you actually earn, and see what the compounding frequency is worth on your balance.
Effective annual yield
5.01%
4.9% nominal compounded monthly
- Balance after 5 years
- $31,925
- Interest earned
- $6,925.00
- Gain over the headline rate
- 0.11%
| Opening balance | $25,000 |
|---|---|
| Nominal rate | 4.9% |
| Effective yield | 5.01% |
| Compounding is worth | $800.00 |
| Ending balance | $31,925 |
- Assumes the rate holds for the whole period and interest is left to compound rather than withdrawn.
A 4.90% rate compounded monthly is a 5.01% effective yield — on $25,000 over five years that is $138 more than the headline number implies.
How this is calculated
How this is calculated
Nominal is a quote, effective is a result
A nominal rate divides evenly across the periods and ignores that each period’s interest earns interest afterwards. Compounding 4.90% monthly gives 5.01%; daily gives 5.02%. The gap widens as the rate rises — at 12% nominal, monthly compounding is worth 12.68%.
APY = (1 + nominal ÷ n)^n − 1Frequency matters less than people expect
Moving from monthly to daily compounding on 4.90% adds about one basis point. A rate 0.15% higher with annual compounding beats a daily-compounded account every time, so compare the effective yield rather than the schedule.
APY and APR answer opposite questions
APY is what you earn and includes compounding. APR is what you pay and, in most markets, excludes it while including fees. The same 6% quoted as APR on a monthly-compounded loan actually costs 6.17%.
Worked example: $25,000 at 4.90% compounded monthly for five years
| Advertised rate | 4.90% |
|---|---|
| Compounded | Monthly |
| Balance | $25,000 |
| Effective yield | 5.01% |
|---|---|
| Ending balance | $31,927 |
| Interest earned | $6,927 |
The same money at 4.90% with annual compounding ends at $31,758 — the compounding schedule alone is worth $169 over the period.
What this assumes
- The rate holds for the whole period.
- Interest is left in the account rather than withdrawn.
- No account fees or withholding tax.
- No further deposits.
Where this commonly goes wrong
- Introductory bonus rates usually apply for three or four months only, so the advertised yield describes a fraction of the year.
- Many bonus rates require a monthly deposit and no withdrawals; a single breach drops the whole month to the base rate, often under 1%.
- Tax is charged on interest as it is earned in most markets, so the after-tax yield is well below the advertised figure.
Questions
What is the difference between interest rate and APY?
The interest rate is the nominal quote; APY is what you actually earn once interest compounds on itself. At 4.90% compounded monthly the APY is 5.01%, which is the figure to compare between accounts.
How do I calculate APY?
Divide the nominal rate by the number of compounding periods, add one, raise it to that number of periods and subtract one. For 4.90% monthly: (1 + 0.049 ÷ 12)^12 − 1 = 5.01%.
Is daily compounding much better than monthly?
Barely. On 4.90% the difference is about one basis point, or $12 on $25,000 over five years. A rate even 0.10% higher beats any change in compounding frequency, so compare rates first.
What is the difference between APY and APR?
APY is what you earn and includes compounding; APR is what you pay and typically includes fees but not compounding. A 6% APR loan compounding monthly has an effective cost of 6.17%.
Why is my actual interest less than the advertised APY?
Usually an introductory rate that expired, a bonus condition you missed, or tax. Bonus rates commonly require a monthly deposit and no withdrawals, and breaching either drops the month to a base rate that can be under 1%.
Does APY account for tax?
No. Advertised yields are always pre-tax. If you pay 30% on interest, a 5.01% APY nets about 3.51%, which is what should be compared against inflation when deciding whether cash is really growing.
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Sources
This calculator does arithmetic on the figures you enter. It does not account for tax, fees, or your personal circumstances.
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