What is Annual Percentage Yield (APY)?

Question

I have a Washington Mutual Savings account that has an Annual Percentage Yield (APY) of 5.00%, but what does this mean? Also, the same account has an Interest Rate of 4.89%, what does this mean and how is it different than the APY?

Answer 1

APY is a standardized formula used by the FRB to calculate a loan rate that can be compared to other loan rates by consumers. In essence the formula makes all loans the same for the purpose of calculating the 'real' cost of the loan.

Answer 2

I called a WaMu rep and even they couldn't explain it. I hope someone out there knows.

Answer 3

I believe it means something like this: the annual "rate" is 4.89%, which is credited probably monthly based on your balance.  Since each month you are building up a little bit of money, by the end of the year, it is closer to 5.00% of your original amount, not exactly 4.89%.