Interest rate and annual percentage yield (APY) are two different things, though they are related terms. When you open a savings account, you’ll often be given both numbers, usually expressed in percentages. The bank will typically emphasize the APY over the interest rate. It is often a higher percentage, which means the account yields greater interest than the interest rate.

Arriving at interest rate is a very simple equation. Say a bank offers a 10% yearly interest on a savings account. If you plop $1,000 into a bank account at the beginning of the year, then common sense and easy math would dictate you’d have $1,100 at the end of the year. This is only accurate if the interest is not compounded during the year. However, in most cases, interest is compounded on a weekly, daily or monthly basis. When interest is compounded more frequently, annual percentage yield is a higher percentage.

For example, if your interest is compounded monthly, each month, you’d have one-twelfth of 10% added to your total account or roughly .83% interest added. In the first month, you’d make $8.30. The next month, when your interest is compounded again, you’d have $1008.30 to which the monthly rate would be applied. So you would add about $8.34 to your total balance. The more often interest in compounded, the higher the APY becomes as the year advances. Provided you left your money untouched for a year, by the end of the year, APY would be 10.471%, and you’d have $1,104.71. If interest was compounded daily, the APY would be 10.516%.

The formula to calculate APY is based on interest rate and the number of times per year interest in compounded.