The local bank is having a CD promotion. One of the ads confuses me. It's shows an interest rate of 5.25% and an APY of 5.18% on an 18-month account. I know to compare APYs between banks, but I thought the APY was always at least as big as the interest rate. Is there an error in the ad?
There is no error. The bank appears to be offering a CD that doesn't compound interest during its term, and only pays interest at maturity. There's a specific math formula that banks have to use to calculate the Annual Percentage Yield (APY) for an account. If interest is calculated and paid only at maturity on a time deposit account, and the term of the account is longer than one year, the formula will always result in an APY that's lower than the interest rate.
To avoid the confusion that this fluke of calculation can cause, many banks now require that interest be paid out of their non-compounding CD accounts at least once a year. When they do that, they are permitted to disclose an APY that's the same as the interest rate. The bank you're asking about doesn't seem to have taken that step.
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There is no error. The bank appears to be offering a CD that doesn't 