apy vs interest rate: do they mean the same thing?

No, they don't. Interest rate on your account is simply a figure showing the interest you will earn annually while the APY is a projection of the monthly interest plus compound interest you will earn on the account for a period of one year if you don't make any withdrawal from the account.

APY and interest rate are related but NOT the same thing.

✅Interest Rate (Nominal Rate)

This is the basic rate a bank pays you for keeping money in an account.

It does not include the effect of compounding.

Think of it as:

“How much interest the bank pays per year before compounding is considered.”

✅ APY (Annual Percentage Yield)

APY shows the real return you earn in one year, including compounding.

Compounding means:

You earn interest

Then that interest earns more interest

And so on

Because of this, APY is always equal to or higher than the interest rate.

Think of APY as:

“How much you truly earn after compounding is included.”

Simple Example

A savings account has:

Interest rate: 5%

It compounds monthly

Because of compounding, your real yearly return might be around 5.12% APY.

So:

Interest rate = 5%

APY = 5.12% (your true earnings)