What Is APY and Why Does It Matter When Comparing Bank Accounts?

Updated August 24, 2026 · every figure carries the source it was read from and the date it was read

APY (Annual Percentage Yield) is the standardized metric that BanksYouPick uses to rank every savings account, CD, and checking account. APY accounts for compound interest — something the nominal interest rate alone does not capture. Understanding APY is essential for making accurate comparisons between bank accounts.

What is the formula for calculating APY?

APY = (1 + r/n)^n - 1, where r is the nominal annual interest rate and n is the number of compounding periods per year. For daily compounding (n=365) at a 4.00% nominal rate: APY = (1 + 0.04/365)^365 - 1 = 4.08%. This means daily compounding at 4.00% nominal produces a 4.08% effective yield. Note carefully what this does and does not mean: a higher compounding frequency produces a higher APY from the same nominal rate, but once two accounts are both quoting APY, the comparison is already complete. "Compounds daily" is not an extra advantage on top of an APY — it is one of the inputs that produced it.

How much more do you earn with daily vs monthly compounding?

On a $10,000 deposit at 4.00% nominal rate: daily compounding earns $408.08 per year, monthly compounding earns $407.42, quarterly compounding earns $406.04. The difference is small on $10,000 but grows with larger balances and longer time horizons. BanksYouPick always displays APY, which already includes the compound effect, so APY figures can be compared directly against each other with no further adjustment.

Frequently asked questions about APY