Two interest quotes can both say 5 percent and describe different one-year amounts. One may state an annual interest rate before compounding. The other may state the annual percentage yield, which includes the effect of compounding.
For US consumer deposit accounts, the CFPB's Regulation DD definitions distinguish the interest rate from the annual percentage yield, or APY. The interest rate does not reflect compounding; the APY reflects interest and compounding on an annual basis.
The same deposit for the same year
Consider two invented offers. Each starts with $2,400 deposited on January 1, 2027, and ends on January 1, 2028: 365 days. No further deposits or withdrawals occur. The balances change only through the stated interest credits; there are no fees, bonuses or taxes. All interest stays in the account. The rates remain fixed, and every stated credit posts. Both 5 percent figures are exact supplied terms, not rounded labels.
- Offer A: 5 percent nominal annual interest rate. Each monthly credit is the opening balance for that monthly period multiplied by 0.05 divided by 12. Round each credit to the nearest cent, with half a cent rounded upward, then add it to the balance. Credits post on each monthly anniversary, from February 1, 2027, through January 1, 2028. The next month includes previously credited interest.
- Offer B: 5 percent effective annual yield. Its supplied schedule gives a single $120 credit on January 1, 2028, exactly 5 percent of the opening $2,400, with no interim credits. That payment date is an additional term; an APY label alone does not specify the credit schedule.
Follow the credits
A's first credit is $10, bringing the balance to $2,410. The second is $10.04 after the stated rounding, bringing it to $2,420.04. The annual quote supplies a monthly rate applied to a balance that includes earlier interest.
After all twelve credits, A contains $2,522.79. It has added $122.79, rather than $120. B contains $2,520 after its single $120 credit.
One opening deposit, two supplied interest conventions
Scroll across to see every column. Use the arrow keys when the table is focused.
| Measure at the one-year endpoint | Offer A | Offer B |
|---|---|---|
| Interest credited | $122.79 | $120.00 |
| Ending balance | $2,522.79 | $2,520.00 |
| Interest as a percentage of opening deposit | 5.11625% | 5% |
Read both on an annual yield basis
For this complete 365-day model, divide each offer's interest by the opening deposit. A gives $122.79 ÷ $2,400 × 100 = 5.11625 percent, or about 5.12 percent. B gives exactly 5 percent. The CFPB's APY formula for account disclosures uses interest divided by principal for a 365-day term.
Do not take B's 5 percent effective annual yield, divide it by twelve and compound that result again. That would treat the annual yield as an interest rate before compounding. B's quoted annual yield already describes the year's interest under its supplied conditions.
Try repairing a note saying that both offers pay $120 because both quote 5 percent. Name the measure beside each quote, keep its credit dates and report the one-year amounts. A adds $2.79 more in this model.
Neither calculation adjusts for price changes. The purchasing-power reference takes that separate question further.
For the decisions behind business figures, read the opening of Infinite Upside: Building Wealth With Room to Live, Vijay Sheth's business memoir.
Read alongside the book
Original commentary and discussion material. Read the full personal accounts in Infinite Upside: Building Wealth With Room to Live, by Vijay Sheth.
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