LOMA 308 Module 3 Exam Questions and Answers With Verified Solutions 2025
Interest on investments, 3 factors affect their growth - ✔✔1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates - ✔✔Remember that interest is a fee that individuals and financial institutions pay (or
charge) for the use of borrowed money. And the amount of interest earnings depends on the interest
rate that's applied to the principal.
Interest rates are usually stated in decimal form, so a 5 percent interest rate appears as 0.05 and a 2.5
percent rate appears as 0.025.
Interest earned = $1,000 × 0.025 = $25
Calculating Interest Earned - ✔✔Principal (regular amount) × Interest rate = Interest earned
Interest rate - ✔✔Interest rate = Interest amount ÷ Principal
simple interest - ✔✔the amount of interest earned for one year is equal to the principal multiplied by
the interest rate. As a result, when an investment earns simple interest, the nominal interest rate and
the effective interest rate are the same.
The total amount of simple interest earned is equal to the interest for one year multiplied by the
number of years in the investment period.
At a constant annual rate of 5% simple interest, after 100 years the $10 account would have earned $50
in interest (100 x $0.50), and the total value of the investment would be $60.00.
Compound interest - ✔✔When interest is compounded, the interest earned each investment period is
added to the original principal amount, and that total is used as the beginning balance when calculating
interest earnings for the next period. In this case, the effective interest rate is greater than the nominal
interest rate.
,Compound Interest:
At a constant annual rate of 5% compound interest, after 100 years the $10 investment would have
earned $1,305.01 in interest and the total value of the investment would be $1,315.01.
Effective Interest Rate - ✔✔The type of interest rate that includes the effects of compounding.
The Rule of 72 - ✔✔Investors can use a simple rule of thumb known as the Rule of 72 to estimate how
fast a principal sum doubles at a specified compound interest rate. The Rule of 72 states that, for a
known interest rate, under annual compounding, the approximate number of years for a principal sum
to double is 72 divided by the interest rate.
Years to double = 72 ÷ Interest rate
Steadfast Insurance can calculate the interest amount it earned on an initial sum of money invested for
one year at a specified interest rate by ( multiplying / dividing ) the principal by the interest rate.
multiplying
dividing - ✔✔Multiplying- An investor can calculate the interest amount earned on an initial sum of
money invested for one year at a specified interest rate by multiplying the principal by the interest rate.
Because ( simple / compound ) interest is applied to the same amount of principal each year, the
amount of interest earned each year is the same, found by multiplying the principal amount by the
interest rate.
simple
compound - ✔✔simple- Because simple interest is applied to the same amount of principal each year,
the amount of interest earned each year is the same, found by multiplying the principal amount by the
interest rate.
Because the nominal interest rate includes the effects of compounding, it's usually greater than the
effective interest rate.
True
,False - ✔✔False- Because the effective interest rate includes the effects of compounding, it's usually
greater than the nominal interest rate. And it increases even more if interest is compounded more than
once each year.
Steadfast Insurance can use the Rule of 72 to
A. Estimate how fast a principal sum doubles at a specified compound interest rate
B. Determine the rate of interest a principal sum must earn to double in a certain number of years.
Both A and B
A only
B only
Neither A nor B - ✔✔The Rule of 72 states that, for a known interest rate, under annual compounding,
the approximate number of years for a principal sum to double is 72 divided by the interest rate.The
Rule of 72 can also help determine the rate of interest a principal sum must earn to double in a certain
number of years.
So far, you've seen how factors such as interest rates, types of interest, and time affect investment
values. How do you think insurers use this information? (Choose all that apply.) - ✔✔The time value of
money (TVOM) concept explains the effects of interest rates, types of interest, and time on investment
values. Insurers use TVOM to determine the future value of an investment and the amount they need to
invest today to earn a given amount in the future. TVOM doesn't help with investment choices.
TVOM - ✔✔Insurers rely on the concept of the time value of money (TVOM) to explain the relationships
among payment amounts, interest rates, and time.According to this concept, a sum of money has both a
present value (PV) and a future value (FV).
Present value - ✔✔In simple terms, the present value of an investment is the principal—the original
amount invested before it's affected by interest.
Present value = Principal
Future value - ✔✔The future value is the invested principal plus the interest generated by the
investment over time.
Future value = Principal + Interest earned
, The following statement(s) can correctly be made about present value and future value:
A. Generally, a sum of money invested today has a present value that is less than its future value
because of interest.
B. A sum of money invested today for 10 years will grow to a larger sum than the same amount of
money invested for 5 years.
Both A and B
A only
B only
Neither A nor B - ✔✔In the next part of the lesson, we'll take a closer look at future values.
FV for single amount - ✔✔Analysts typically substitute present value (PV) for principal because, like
principal, present value represents a sum of money before it is affected by interest. So, the formula for
calculating the future value (FV) of a single amount for one period is
FV = PV + Interest earned
FV for one year investment - ✔✔For a one-year period, the amount of interest earned equals the
present value multiplied by the interest rate, i. Because compounding only occurs when money is held
for more than one period, we don't specify a value for the number of interest periods, n. We can express
the formula for the interest earned on a one-year investment as follows:
Interest earned = PV × i
Elegant Financial invested $300,000 for one year at 5 percent interest. How much did Elegant have at
the end of the year?
___________ = PV × (1 + i )
$1,500,000
$450,000
$315,000 - ✔✔315,000
Fv of a single amount for mutiple periods - ✔✔The general formula for finding the future value of an
investment earning compound interest, i, for n periods, can be written as:
FV = PV × (1 + i )n
Interest on investments, 3 factors affect their growth - ✔✔1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates - ✔✔Remember that interest is a fee that individuals and financial institutions pay (or
charge) for the use of borrowed money. And the amount of interest earnings depends on the interest
rate that's applied to the principal.
Interest rates are usually stated in decimal form, so a 5 percent interest rate appears as 0.05 and a 2.5
percent rate appears as 0.025.
Interest earned = $1,000 × 0.025 = $25
Calculating Interest Earned - ✔✔Principal (regular amount) × Interest rate = Interest earned
Interest rate - ✔✔Interest rate = Interest amount ÷ Principal
simple interest - ✔✔the amount of interest earned for one year is equal to the principal multiplied by
the interest rate. As a result, when an investment earns simple interest, the nominal interest rate and
the effective interest rate are the same.
The total amount of simple interest earned is equal to the interest for one year multiplied by the
number of years in the investment period.
At a constant annual rate of 5% simple interest, after 100 years the $10 account would have earned $50
in interest (100 x $0.50), and the total value of the investment would be $60.00.
Compound interest - ✔✔When interest is compounded, the interest earned each investment period is
added to the original principal amount, and that total is used as the beginning balance when calculating
interest earnings for the next period. In this case, the effective interest rate is greater than the nominal
interest rate.
,Compound Interest:
At a constant annual rate of 5% compound interest, after 100 years the $10 investment would have
earned $1,305.01 in interest and the total value of the investment would be $1,315.01.
Effective Interest Rate - ✔✔The type of interest rate that includes the effects of compounding.
The Rule of 72 - ✔✔Investors can use a simple rule of thumb known as the Rule of 72 to estimate how
fast a principal sum doubles at a specified compound interest rate. The Rule of 72 states that, for a
known interest rate, under annual compounding, the approximate number of years for a principal sum
to double is 72 divided by the interest rate.
Years to double = 72 ÷ Interest rate
Steadfast Insurance can calculate the interest amount it earned on an initial sum of money invested for
one year at a specified interest rate by ( multiplying / dividing ) the principal by the interest rate.
multiplying
dividing - ✔✔Multiplying- An investor can calculate the interest amount earned on an initial sum of
money invested for one year at a specified interest rate by multiplying the principal by the interest rate.
Because ( simple / compound ) interest is applied to the same amount of principal each year, the
amount of interest earned each year is the same, found by multiplying the principal amount by the
interest rate.
simple
compound - ✔✔simple- Because simple interest is applied to the same amount of principal each year,
the amount of interest earned each year is the same, found by multiplying the principal amount by the
interest rate.
Because the nominal interest rate includes the effects of compounding, it's usually greater than the
effective interest rate.
True
,False - ✔✔False- Because the effective interest rate includes the effects of compounding, it's usually
greater than the nominal interest rate. And it increases even more if interest is compounded more than
once each year.
Steadfast Insurance can use the Rule of 72 to
A. Estimate how fast a principal sum doubles at a specified compound interest rate
B. Determine the rate of interest a principal sum must earn to double in a certain number of years.
Both A and B
A only
B only
Neither A nor B - ✔✔The Rule of 72 states that, for a known interest rate, under annual compounding,
the approximate number of years for a principal sum to double is 72 divided by the interest rate.The
Rule of 72 can also help determine the rate of interest a principal sum must earn to double in a certain
number of years.
So far, you've seen how factors such as interest rates, types of interest, and time affect investment
values. How do you think insurers use this information? (Choose all that apply.) - ✔✔The time value of
money (TVOM) concept explains the effects of interest rates, types of interest, and time on investment
values. Insurers use TVOM to determine the future value of an investment and the amount they need to
invest today to earn a given amount in the future. TVOM doesn't help with investment choices.
TVOM - ✔✔Insurers rely on the concept of the time value of money (TVOM) to explain the relationships
among payment amounts, interest rates, and time.According to this concept, a sum of money has both a
present value (PV) and a future value (FV).
Present value - ✔✔In simple terms, the present value of an investment is the principal—the original
amount invested before it's affected by interest.
Present value = Principal
Future value - ✔✔The future value is the invested principal plus the interest generated by the
investment over time.
Future value = Principal + Interest earned
, The following statement(s) can correctly be made about present value and future value:
A. Generally, a sum of money invested today has a present value that is less than its future value
because of interest.
B. A sum of money invested today for 10 years will grow to a larger sum than the same amount of
money invested for 5 years.
Both A and B
A only
B only
Neither A nor B - ✔✔In the next part of the lesson, we'll take a closer look at future values.
FV for single amount - ✔✔Analysts typically substitute present value (PV) for principal because, like
principal, present value represents a sum of money before it is affected by interest. So, the formula for
calculating the future value (FV) of a single amount for one period is
FV = PV + Interest earned
FV for one year investment - ✔✔For a one-year period, the amount of interest earned equals the
present value multiplied by the interest rate, i. Because compounding only occurs when money is held
for more than one period, we don't specify a value for the number of interest periods, n. We can express
the formula for the interest earned on a one-year investment as follows:
Interest earned = PV × i
Elegant Financial invested $300,000 for one year at 5 percent interest. How much did Elegant have at
the end of the year?
___________ = PV × (1 + i )
$1,500,000
$450,000
$315,000 - ✔✔315,000
Fv of a single amount for mutiple periods - ✔✔The general formula for finding the future value of an
investment earning compound interest, i, for n periods, can be written as:
FV = PV × (1 + i )n
