A total of $120 is invested monthly with an annual compound interest rate of 6%, compounded monthly. Which of the following calculations explains how you can find the principal amount at the beginning of the second month?(1 point)
Incorrect you add another 120
So what’s the answer
To find the principal amount at the beginning of the second month, you need to calculate the amount that is left after the first month's interest is compounded.
The formula for calculating compound interest is:
A = P(1 + r/n)^(nt)
Where:
A = the final amount including interest
P = the principal amount (initial investment)
r = annual interest rate (expressed as a decimal)
n = number of times interest is compounded per year
t = number of years
In this case, the principal amount is $120 and the annual interest rate is 6%, compounded monthly. This means that the interest is compounded 12 times a year.
So, the calculation to find the principal amount at the beginning of the second month would be:
P' = A(1 + r/n)^(-1)
P' = $120(1 + 0.06/12)^(-1)
P' = $120(1 + 0.005)^(-1)
Therefore, the calculation P' = $120(1.005)^(-1) explains how you can find the principal amount at the beginning of the second month.