6 tips for first-time CD shoppers

The truth is in the APY
4 of 8
The truth is in the APY

The interest rate does not tell the whole story.

Instead, a CD's annual percentage yield, or APY, paints the full picture of your expected return. The Truth in Savings Act requires that all banks use a standard formula to calculate their advertised APYs. This formula takes the CD's compounding rate into account to deliver an exact calculation of how much money a CD will help you earn annually.

For example, if a five-year CD carries an interest rate of 2.46 percent, an investor's return -- the APY -- will be slightly higher annually at 2.49 percent because the interest is compounded daily.

To better understand the difference between compounding daily versus monthly or quarterly and how it affects your APY, use Bankrate's compound interest calculator.




Show Bankrate's community sharing policy

Connect with us