We have here the formula for Compound Interest:
[tex]A=P(1+\frac{r}{n})^{nt}[/tex]
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. ]
