APY (Annual Percentage Yield) measures the actual yearly return you earn on savings, taking compounding into account. A 5% rate compounded monthly produces an APY of about 5.12%, because each month’s interest starts earning interest itself.
Banks advertise APY on savings products because it’s the higher, more flattering number — while loans are quoted in APR. When comparing savings accounts or CDs, always compare APY to APY.
Watch compounding work in the Compound Interest Calculator.