Which three variables primarily determine the amount of interest a person could earn from a savings account, according to the time value of money equations?

• A. Interest rate, compounding frequency, and withdrawal amount
• B. Principal, inflation rate, and tax rate
• C. Principal, interest rate, and time
• D. Time, account fees, and minimum balance

Answer: (C)

Verified step by step guidance

1. Understand the concept of the time value of money (TVM), which states that money available today is worth more than the same amount in the future due to its earning potential. The formula for calculating interest earned is based on this principle.
2. Identify the key variables in the TVM equation. The general formula for future value (FV) is: $\mathrm{FV}=P\times \; (1\; +r)t$, where P is the principal amount, r is the interest rate, and t is the time period.
3. Recognize that the principal (P) is the initial amount of money deposited into the savings account. This is the base amount on which interest is calculated.
4. Understand that the interest rate (r) is the percentage at which the principal grows over a specific period. A higher interest rate results in more interest earned.
5. Acknowledge that time (t) is the duration for which the money is invested or saved. The longer the time period, the more interest is earned due to compounding effects.