1 | Page
LOMA 308 Module 3 Questions and
Correct Answers/ Latest Update /
Already Graded
Interest on investments, 3 factors affect their growth
Ans: 1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates
,2 | Page
Ans: 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
Ans: Principal (regular amount) × Interest rate = Interest earned
Interest rate
Ans: Interest rate = Interest amount ÷ Principal
simple interest
,3 | Page
Ans: 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
, 4 | Page
Ans: 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
Ans: The type of interest rate that includes the effects of compounding.
The Rule of 72
LOMA 308 Module 3 Questions and
Correct Answers/ Latest Update /
Already Graded
Interest on investments, 3 factors affect their growth
Ans: 1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates
,2 | Page
Ans: 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
Ans: Principal (regular amount) × Interest rate = Interest earned
Interest rate
Ans: Interest rate = Interest amount ÷ Principal
simple interest
,3 | Page
Ans: 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
, 4 | Page
Ans: 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
Ans: The type of interest rate that includes the effects of compounding.
The Rule of 72
