Question

The formula used to calculate the value of a savings accounty =(1+)120What does theafter t years is A(t)=0.04= 1500 1+120.04fraction represent?12y=a(1)aeAthe daily interest rateB how long the money has been in the accountCthe monthly interest rateD the starting balance in the account

Answer 1

We have here the formula for Compound Interest:

$A=P(1+\frac{r}{n})^{nt}$

Where:

• A is the accrued amount.

,

• P is the Principal (the original amount of money, the starting amount of money).

,

• r is the interest rate.

,

• n is the number of times per year compounded.

,

• t is the time in years.

When we have that n is equal to 12, we are talking here about that the amount of money is being compounded monthly (we have 12 months in a year, 12 periods, n = 12). Therefore, we are dividing the rate, r, by the number of compoundings per year, n, and this is the rate per each new compounding period of time, r/n, and, in this case, n = 12 (monthly interest rate).

Therefore, in few words, the fraction (0.04/12) is the monthly interest rate (option C).

[If we see the other options, we have:

• The daily interest rate would be given by 0.04/365.

,

• How long the money has been in the account is time, t.

,

• The starting balance in the account is the Principal, P. ]