Rate and APY are two different ways to measure the return of your investment.
  • The rate is what you receive on your investment on a daily basis, regardless of the investment term (length of time) or how your interest earnings are reinvested.
  • The APY stands for Annual Percentage Yield, and it takes into account how frequently your interest is compounded.
The APY provides you with a better basis when comparing your real return on different assets, because it makes it easy to see which account will earn you the best return over time.

Here's an example. Let's assume you have an account that earns 1.00% annual interest rate. You open the account and deposit $10,000 into the account at the start of the year.  Depending on whether your interest is credited monthly, quarterly or annually, the actual amount the account will yield at the end of the year will be different. That's because once interest is credited, it begins to earn interest as well.

In the example above, annual interest crediting would earn you $100.27 on your $10,000 investment, or 1.00% APY (Annual Percentage Yield). However, if the same rate is compounded monthly, you would earn $100.74, which is actually closer to 1.01% APY.

As interest rates increase, the effect of the compounding increases, making a larger and larger difference. As you compare accounts, always consider the APY, not just the interest rate.