Two numbers, one CD
The interest rate (sometimes called the nominal rate) is the base rate the bank pays before compounding. The annual percentage yield (APY) is what you actually earn over a year once compounding is included. Under the federal Truth in Savings Act and its rule, Regulation DD, banks and credit unions must disclose APY so consumers can compare accounts on a consistent basis.
How compounding changes the yield
When interest is added to your balance, the next interest payment is calculated on a slightly larger amount. The more often that happens, the bigger the gap between the rate and the APY. A 4.40% interest rate compounded daily works out to roughly 4.50% APY; compounded annually, the APY would equal the rate at 4.40%.
Because APY already bakes in compounding, it’s the number to use when comparing CDs.
Short terms and APY
APY is always expressed over a full year. If a CD is shorter than a year, you earn only part of the APY. A 3-month CD at 4.00% APY pays about 0.99% on your money by maturity; a 6-month CD at 4.00% APY pays about 1.98%.
Payout schedules aren’t the same as APY
Some CDs credit interest monthly, others quarterly or only at maturity. If you choose to have interest paid out to another account instead of compounding, your effective return will be a bit below the APY. Brokered CDs usually pay simple interest into your brokerage account, so they don’t compound at all.
How to compare CD offers fairly
- Compare APY to APY, never a rate to an APY.
- Compare the same term — or calculate dollar interest for your actual timeline using our calculator.
- Factor in minimums, penalties and eligibility.
Frequently asked questions
Is a higher APY always better?
Why does my 6-month CD earn less than the APY?
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