In short

  • A nominal interest rate does not include within-year compounding.
  • APY expresses the effective one-year result of the rate and compounding frequency.
  • A mathematical conversion does not replace the official disclosure for a real account.

The nominal rate is the starting input

A nominal annual interest rate states the rate before the effect of compounding within the year. CFPB Regulation DD defines an interest rate for deposit disclosures as an annual rate that does not reflect compounding.

APY includes compounding

For nominal rate r compounded n times per year, APY = (1 + r/n)^n − 1. More frequent compounding raises the effective yield when the nominal rate is positive and all other assumptions remain the same.

A 5% example

A 5% nominal rate compounded annually gives a 5% APY. Compounded monthly, it gives about 5.116%. The difference is the interest earned on earlier interest during the year.

Reverse conversion

If the APY and compounding frequency are known, the equivalent nominal rate is n((1 + APY)^(1/n) − 1). This is useful for comparing the mathematical effect of rates stated in different ways.

Use the official account disclosure

CalcQuick performs a compounding-only conversion. Actual account disclosures can follow jurisdiction-specific rules for terms, days, tiers, bonuses and fees. Use the institution’s official disclosure for a real decision.

Sources

These primary or official references support the formulas, definitions or scope used in this guide.