when you save money using a savings account compound interest is favorable the interest earned on these accounts is compounded and is compensation to the account holder for allowing the bank to use the deposited funds 
if for example you deposit 500 000 into a high yield savings account the bank can take 300 000 of these funds to use as a mortgage loan to compensate you the bank pays 5 interest into the account annually so while the bank is taking 8 from the borrower it is giving 5 to the account holder netting it 3 in interest in effect savers lend the bank money which in turn provides funds to borrowers in return for interest borrower s cost of debtwhile interest rates represent interest income to the lender they constitute a cost of debt to the borrower companies weigh the cost of borrowing against the cost of equity such as dividend payments to determine which source of funding will be the least expensive since most companies fund their capital by either taking on debt and or issuing equity the cost of the capital is evaluated to achieve an optimal capital structure apr vs apyinterest rates on consumer loans are typically quoted as the annual percentage rate apr this is the rate of return that lenders demand for the ability to borrow their money 3 for example the interest rate on credit cards is quoted as an apr in our example above 4 is the apr for the mortgage or borrower the apr does not consider compounded interest for the year the annual percentage yield apy is the interest rate that is earned at a bank or credit union from a savings account or cd this interest rate takes compounding into account 