LOMA 308 Module 3 || ACTUAL QUESTIONS WITH
100% CORRECT ANSWERS!!
Interest on investments, 3 factors affect their growth correct answers 1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates correct answers 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 correct answers Principal (regular amount) × Interest rate =
Interest earned
Interest rate correct answers Interest rate = Interest amount ÷ Principal
simple interest correct answers 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 correct answers 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 correct answers The type of interest rate that includes the effects of
compounding.
The Rule of 72 correct answers 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 correct answers 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 correct answers 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 correct answers 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 correct answers 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.)
correct answers 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 correct answers 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 correct answers 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 correct answers 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 correct answers In the next part of the lesson, we'll take a closer look at
future values.
FV for single amount correct answers 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 correct answers 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 correct answers 315,000
Fv of a single amount for mutiple periods correct answers 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
So, if we deposited $100,000 into an account that earns 5 percent interest, compounded
annually, for five years, the future value of this investment calculated using the formula
would be:
FV = $100,000 × (1.05)5
FV = $100,000 × (1.05)(1.05)(1.05)(1.05)(1.05)
FV = $127,628
Montague Funds invested $100,000 at 3 percent interest compounded semi-annually.
Montague wants to know what its investment will be worth in two years. When finding the
, future value of its investment, what value should Montague use for the number of periods and
the interest rate?
number of periods = 2, interest rate = 3
number of periods = 2, interest rate = 1.5
number of periods = 4, interest rate = 1.5
number of periods = 4, interest rate = 3 correct answers nUMBER OF PERIODS = 4,
INTEREST RATE = 1.5 - When interest is compounded more often than annually, you find
the number of compounding periods by multiplying the number of years a sum is invested by
the number of compounding periods in a year (2 years x 2 compounding periods per year = 4
periods). You then adjust the interest rate by dividing the stated interest rate by the number of
compounding periods each year (3 ÷ 2 = 1.5).
One true statement about a future value interest factor (FVIF) table is that:
For any given period of time and any given interest rate, the FVIF is always greater than 1.
For any given period of time, FVIF values increase as the interest rate decreases.
For any given interest rate, FVIF values decrease as the investment period increases.
To find the future value of a sum greater than $1 at a given rate of interest for a stated number
of periods, we mutiply the FVIF value by the number of periods. correct answers For any
given period of time and any given interest rate, the FVIF is always greater than 1.
For any given period of time, FVIF values increase as the interest rate increases.For any
given interest rate, FVIF values increase as the investment period increases. To find the
future value of a sum greater than $1, multiply the FVIF value by the sum.
Durham Financial invested $100,000 at 4 percent interest compounded quarterly. Using the
FVIF Table above, what will be the value of Durham's investment in one year?
$104,000
$104,060
101,000
That's correct! correct answers $104,060 To calculate the future value, multiply the number
of years by the number of compounding periods per year (1 × 4 = 4) to get the number of
periods. Then divide the interest rate by the number of compounding periods per year to get
the interest rate (4% ÷ 4 = 1). Then find the FVIF in our table for 4 periods at 1 percent
interest (1.0406) and multiply that by the amount Durham invested ($100,000 x 1.0406) to
give the correct answer of $104,060
Annuities correct answers An annuity can refer to any series of payments that are equal in
amount and paid at regular intervals. An annuity does not refer to a series of unequal
payments or payments made at irregular intervals.
An annuity can refer to payments received or payments made.
An annuity is not the same as an annuity contract, which is a specific type of financial
product that can be structured to provide monthly income benefits. As a result, the formulas
used to calculate the values of an annuity are valid without any reference to an actual annuity
contract.
ordinary annuity correct answers payment made or received at the end of each annuity period.
A series of paychecks an employee receives at the end of each month
A series of interest payments on a bond
100% CORRECT ANSWERS!!
Interest on investments, 3 factors affect their growth correct answers 1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates correct answers 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 correct answers Principal (regular amount) × Interest rate =
Interest earned
Interest rate correct answers Interest rate = Interest amount ÷ Principal
simple interest correct answers 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 correct answers 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 correct answers The type of interest rate that includes the effects of
compounding.
The Rule of 72 correct answers 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 correct answers 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 correct answers 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 correct answers 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 correct answers 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.)
correct answers 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 correct answers 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 correct answers 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 correct answers 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 correct answers In the next part of the lesson, we'll take a closer look at
future values.
FV for single amount correct answers 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 correct answers 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 correct answers 315,000
Fv of a single amount for mutiple periods correct answers 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
So, if we deposited $100,000 into an account that earns 5 percent interest, compounded
annually, for five years, the future value of this investment calculated using the formula
would be:
FV = $100,000 × (1.05)5
FV = $100,000 × (1.05)(1.05)(1.05)(1.05)(1.05)
FV = $127,628
Montague Funds invested $100,000 at 3 percent interest compounded semi-annually.
Montague wants to know what its investment will be worth in two years. When finding the
, future value of its investment, what value should Montague use for the number of periods and
the interest rate?
number of periods = 2, interest rate = 3
number of periods = 2, interest rate = 1.5
number of periods = 4, interest rate = 1.5
number of periods = 4, interest rate = 3 correct answers nUMBER OF PERIODS = 4,
INTEREST RATE = 1.5 - When interest is compounded more often than annually, you find
the number of compounding periods by multiplying the number of years a sum is invested by
the number of compounding periods in a year (2 years x 2 compounding periods per year = 4
periods). You then adjust the interest rate by dividing the stated interest rate by the number of
compounding periods each year (3 ÷ 2 = 1.5).
One true statement about a future value interest factor (FVIF) table is that:
For any given period of time and any given interest rate, the FVIF is always greater than 1.
For any given period of time, FVIF values increase as the interest rate decreases.
For any given interest rate, FVIF values decrease as the investment period increases.
To find the future value of a sum greater than $1 at a given rate of interest for a stated number
of periods, we mutiply the FVIF value by the number of periods. correct answers For any
given period of time and any given interest rate, the FVIF is always greater than 1.
For any given period of time, FVIF values increase as the interest rate increases.For any
given interest rate, FVIF values increase as the investment period increases. To find the
future value of a sum greater than $1, multiply the FVIF value by the sum.
Durham Financial invested $100,000 at 4 percent interest compounded quarterly. Using the
FVIF Table above, what will be the value of Durham's investment in one year?
$104,000
$104,060
101,000
That's correct! correct answers $104,060 To calculate the future value, multiply the number
of years by the number of compounding periods per year (1 × 4 = 4) to get the number of
periods. Then divide the interest rate by the number of compounding periods per year to get
the interest rate (4% ÷ 4 = 1). Then find the FVIF in our table for 4 periods at 1 percent
interest (1.0406) and multiply that by the amount Durham invested ($100,000 x 1.0406) to
give the correct answer of $104,060
Annuities correct answers An annuity can refer to any series of payments that are equal in
amount and paid at regular intervals. An annuity does not refer to a series of unequal
payments or payments made at irregular intervals.
An annuity can refer to payments received or payments made.
An annuity is not the same as an annuity contract, which is a specific type of financial
product that can be structured to provide monthly income benefits. As a result, the formulas
used to calculate the values of an annuity are valid without any reference to an actual annuity
contract.
ordinary annuity correct answers payment made or received at the end of each annuity period.
A series of paychecks an employee receives at the end of each month
A series of interest payments on a bond
