# Mistake in Investopedia's article on APY?

My question is about James Chen's article on Investopedia, Annual Percentage Yield (APY), last updated on October 17, 2020.

It begins by correctly stating the formula for APY:

``````APY = (1 + r / n)^n - 1
``````

Where "r" is the per-period interest rate (normalised from 0 to 1) and "n" is the number of periods.

Later in the article, James says this (emphasis mine):

Suppose you are considering whether to invest in a one-year zero-coupon bond that pays 6% upon maturity or a high-yield money market account that pays 0.5% per month with monthly compounding.

At first glance, the yields appear equal because 12 months multiplied by 0.5% equals 6%. However, when the effects of compounding are included by calculating the APY, the money market investment actually yields 6.17%, as (1 + .005)^12 - 1 = 0.0617.

The last part doesn't seem to be correct. Shouldn't it have been like this?

``````(1 + .005 / 12)^12 - 1 = 0.00501
``````

That is, the 0.5% interest should be divided by 12, which makes the APY lower.

• Nitpick on the article: a "one-year zero-coupon bond that pays 6% upon maturity" is confusing. Either the bond is bought at par and pays a 6% coupon or was bought at a 6% discount (e.g. a \$100 bond bought for 100/1.06 = 94.34) – D Stanley Feb 12 at 16:35