One of the first things many people consider before buying a certificate of deposit (CD), is the CD's annual percentage yield, or APY. After all, the higher the APY, the more money you can expect to earn from the CD. But what exactly does APY mean, and how is it calculated?
APY refers to how much money you earn on a deposit over a year, taking into account compounding interest. For example, if you put $1,000 into an account for one year at 1.0% non-compounding, or simple interest, you will have $1,010 at the end of the year. The APY is 1.0%—the same as the interest rate. (Actual interest rates and APYs will vary; check our current annual percentage yield for the CD term you choose when you're ready to open an account.)
Now suppose the interest on that account compounds daily, as it does with Ally Bank accounts. The total interest you would be paid for the year is $10.05, for a total value of $1010.05 at the end of the year. In this case, the APY is 1.005%. There are a number of computer programs and calculators online that can help you calculate APY. The Federal Deposit Insurance Corporation (FDIC) also provides the mathematical formula for calculating APY on its website.
While the formula may seem a little complicated, the idea is straightforward: APY measures the rate of return on your deposit over a year taking into account compounding interest. The more frequently interest compounds, the more money you can expect to earn at the end of the year.
At Ally Bank, we compound interest daily for maximum earnings. We offer a variety of CDs with great rates, including our High Yield CD, No Penalty CD and Raise Your Rate CD. Learn more at Allybank.com or call live, 24/7 customer care at 877-247-ALLY (2559) today.
Ally Bank, Member FDIC