What is the formula to compute accrued interest?

To compute accrued interest, the correct approach is to use the formula involving the principal amount, the annual interest rate, and the fraction of the year that has elapsed since the last interest payment. This is why the chosen answer is correct.

Accrued interest represents the interest that has accumulated on a financial obligation over a period without payment being made. The calculation takes into account the total principal amount borrowed or invested and applies the annual interest rate to that figure. The fraction of the year is crucial since interest is typically calculated on an annual basis, and the actual amount of time that has passed determines how much interest has accrued during that specific period.

For illustration, if a loan has a principal of $1,000, an annual interest rate of 5%, and three months have passed since the last payment, the calculation would involve multiplying the principal by the interest rate and then by the fraction of the year, which in this case is 3/12. This accurately reflects the interest earned or owed for that time period.

This formula effectively integrates the necessary components—principal, interest rate, and elapsed time—to yield the correct amount of accrued interest.