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.