APY

APY, the annual percentage yield, is the real one-year return including the effect of interest earning interest. A headline rate simply states a percentage per year, while APY accounts for how many times that interest is paid and reinvested.

The difference comes from compounding frequency. A 5% product paid once a year returns exactly 5%, but paid monthly and reinvested it returns about 5.12% over the year, and about 5.13% if compounded daily. Same 5% on the label, different amounts in hand.

So APY is the accurate basis for comparing savings products. Whether a 4.9% account compounded monthly beats a 5.0% account paid once at maturity can only be settled by converting both to APY. Comparing headline rates across products with different payment schedules tells you nothing.

It is the counterpart to APR on the lending side. APR includes fees but not compounding, while APY includes compounding. That is how the convention arose of quoting the larger-looking APY when you receive money and the smaller-looking APR when you pay it. Simply noticing which one an advertisement uses makes your comparison more accurate.