What is the Difference Between Interest Rate and Annual Percentage Yield?
Interest rate and annual percentage yield (APY) are two different things, though they are related terms. When you open a savings account, you’ll often be given both numbers, usually expressed in percentages. The bank will typically emphasize the APY over the interest rate. It is often a higher percentage, which means the account yields greater interest than the interest rate. Arriving at interest rate is a very simple equation. Say a bank offers a 10% yearly interest on a savings account. If you plop $1000 US Dollars (USD) into a bank account at the beginning of the year, then common sense and easy math would dictate you’d have $1100 USD at the end of the year. This is only accurate if the interest is not compounded during the year. However, in most cases, interest is compounded on a weekly, daily or monthly basis. When interest is compounded more frequently, annual percentage yield is a higher percentage. For example, if your interest is compounded monthly, each month, you’d have one-
