LOMA 308 Module 3 questions with correct
answers
Interest |on |investments, |3 |factors |affect |their |growth |- |VERIFIED |ANSWER✔✔-1. |Interest |rate
2. |The |type |of |interest
3. |The |time |period |during |which |the |invested |principal |earns |interest
Interest |rates |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-Principal |(regular |amount) |× |Interest |rate |= |
Interest |earned
Interest |rate |- |VERIFIED |ANSWER✔✔-Interest |rate |= |Interest |amount |÷ |Principal
simple |interest |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-The |type |of |interest |rate |that |includes |the |effects |of |
compounding.
The |Rule |of |72 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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.) |- |VERIFIED |
ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-In |the |next |part |of |the |lesson, |we'll |take |a |closer |look |at |
future |values.
FV |for |single |amount |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-315,000
answers
Interest |on |investments, |3 |factors |affect |their |growth |- |VERIFIED |ANSWER✔✔-1. |Interest |rate
2. |The |type |of |interest
3. |The |time |period |during |which |the |invested |principal |earns |interest
Interest |rates |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-Principal |(regular |amount) |× |Interest |rate |= |
Interest |earned
Interest |rate |- |VERIFIED |ANSWER✔✔-Interest |rate |= |Interest |amount |÷ |Principal
simple |interest |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-The |type |of |interest |rate |that |includes |the |effects |of |
compounding.
The |Rule |of |72 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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.) |- |VERIFIED |
ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-In |the |next |part |of |the |lesson, |we'll |take |a |closer |look |at |
future |values.
FV |for |single |amount |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-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 |- |VERIFIED |ANSWER✔✔-315,000
