Is APY always higher than the nominal rate?

Yes, whenever compounding happens more than once a year — APY only equals the nominal rate when compounding is annual (once a year).

Why do banks advertise APY instead of the nominal rate?

APY represents the real return you'd actually earn in a year, making it the more meaningful (and often more attractive-looking) number for comparing savings products.

APY Calculator

Calculate APY (Annual Percentage Yield) — the real effective annual return once compounding is factored in, from a nominal interest rate.

Nominal annual interest rate

Compounding frequency

Annual Percentage Yield (APY)

5.1162%

How It Works

Why APY differs from the nominal rate

A nominal (stated) interest rate doesn't account for how often it compounds. APY converts it into the actual annual return you'd earn, which is always equal to or higher than the nominal rate when compounding happens more than once a year.

Example Calculation

A 5% nominal rate compounded daily has an APY of about 5.13% — slightly higher than the stated 5% due to compounding.

Common Mistakes

Comparing a nominal rate from one account to the APY from another — always compare like-for-like (APY to APY) since APY already reflects compounding.
Assuming compounding frequency doesn't matter — the gap between nominal rate and APY grows with both a higher rate and more frequent compounding.

Frequently Asked Questions

Is APY always higher than the nominal rate?: Yes, whenever compounding happens more than once a year — APY only equals the nominal rate when compounding is annual (once a year).
Why do banks advertise APY instead of the nominal rate?: APY represents the real return you'd actually earn in a year, making it the more meaningful (and often more attractive-looking) number for comparing savings products.