©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:08AM.
LOMA 308 Module 3 Exam Questions And
Answers |Latest 2025 | Guaranteed Pass.
Interest on investments, 3 factors affect their growth - Answer✔1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates - 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 - Answer✔Principal (regular amount) × Interest rate = Interest
earned
Interest rate - Answer✔Interest rate = Interest amount ÷ Principal
simple interest - 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 - 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
1
, ©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:08AM.
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 - Answer✔The type of interest rate that includes the effects of
compounding.
The Rule of 72 - 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 - 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 - 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 - 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.
2
, ©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:08AM.
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 - 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.) -
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 - 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 - 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 - 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
3
, ©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:08AM.
B only
Neither A nor B - Answer✔In the next part of the lesson, we'll take a closer look at future
values.
FV for single amount - 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 - 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 - Answer✔315,000
Fv of a single amount for mutiple periods - Answer✔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
4
LOMA 308 Module 3 Exam Questions And
Answers |Latest 2025 | Guaranteed Pass.
Interest on investments, 3 factors affect their growth - Answer✔1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates - 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 - Answer✔Principal (regular amount) × Interest rate = Interest
earned
Interest rate - Answer✔Interest rate = Interest amount ÷ Principal
simple interest - 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 - 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
1
, ©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:08AM.
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 - Answer✔The type of interest rate that includes the effects of
compounding.
The Rule of 72 - 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 - 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 - 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 - 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.
2
, ©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:08AM.
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 - 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.) -
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 - 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 - 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 - 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
3
, ©THESTAR 2024/2025 ALL RIGHTS RESERVED 11:08AM.
B only
Neither A nor B - Answer✔In the next part of the lesson, we'll take a closer look at future
values.
FV for single amount - 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 - 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 - Answer✔315,000
Fv of a single amount for mutiple periods - Answer✔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
4
