APY on a CD means the annual percentage yield, or the amount you would earn in one year after accounting for compounding. Banks use APY to show a CD's annualized return.
Rates and account terms change over time. Add the date this information was checked: ****.
APY on a CD at a Glance
| Term | Meaning |
|---|---|
| APY | Annualized return that includes compounding |
| Interest rate | The stated rate paid on the deposit before compounding |
| CD term | How long the money stays in the account |
| Maturity date | The date the CD ends and the money becomes available for withdrawal |
| Early withdrawal penalty | A charge or loss of interest for taking money out before maturity |
How Does CD APY Work?
A CD's APY estimates what your deposit would earn over one year if the principal and interest stay in the account. Your actual earnings also depend on the deposit amount, CD term, compounding schedule and how the bank pays interest.
For example:
- A one-year CD with a $10,000 balance and a 5.00% APY would earn about $500 in interest before taxes or penalties.
- A six-month CD with a $10,000 balance and a 5.00% APY would earn about $246.27 over 182 days, assuming the money stays deposited.
A 5.00% APY does not mean every CD earns 5% of the deposit. APY is an annualized figure, so a six-month CD normally earns less than a one-year CD with the same APY.
What Is the Difference Between CD APY and the Interest Rate?
The interest rate is the basic rate paid on the deposit. APY includes the effect of compounding, which occurs when the interest stays in the CD and earns additional interest.
APY is usually the better number for comparing CD offers because it puts the potential annual return on a common basis. Still, check how the bank handles interest. It may leave the interest in the CD, pay it to you periodically or send it to another account. Some CD disclosures assume that interest remains on deposit until maturity.
Does a Higher APY Always Mean a Better CD?
No. A higher APY may not suit you if the CD matures after you need the money or charges a large early withdrawal penalty.
Compare these terms before opening an account:
- APY: A higher APY generally means more interest if the other terms are equal.
- Term: Choose a maturity date that fits your plans for the money.
- Early withdrawal penalty: Taking money out early can reduce or eliminate your interest earnings.
- Minimum deposit: Some CDs require a large opening deposit.
- Interest payment rules: Find out whether interest compounds, is paid periodically or goes to another account.
- Renewal terms: Many CDs renew automatically at maturity unless you act during the grace period.
- Insurance coverage: Bank CDs are generally FDIC-insured up to $250,000. Eligible credit union CDs are generally insured by the NCUA up to $250,000.
What Happens if You Withdraw Money From a CD Early?
Most CDs charge an early withdrawal penalty when you take out money before the maturity date. The penalty can reduce your interest earnings and, depending on the account terms, may also reduce your principal.
Before opening a CD, compare its term, interest rate and early withdrawal penalty.
Is APY the Same as APR?
No.
- APY measures the annual return earned on a deposit account such as a CD.
- APR generally describes the annualized cost of borrowing money.
When comparing CDs, focus on APY, the term, the early withdrawal penalty and the maturity instructions.
Bottom Line
Use APY to compare the return on different CDs, but do not choose by APY alone. Check when the CD matures, what happens if you withdraw early and how the bank pays interest. The best match is a CD that you can leave untouched until you need the money.