March 25
LOMA 308 Module 3 Exam Complete Questions and Correct
Detailed Answers (Verified Answers)
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
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
pg. 1
, March 25
simple interest
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
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.
pg. 2
, March 25
The Rule of 72
Ans: 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
Ans: 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
pg. 3
, March 25
Ans: 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
Ans: 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
pg. 4
LOMA 308 Module 3 Exam Complete Questions and Correct
Detailed Answers (Verified Answers)
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
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
pg. 1
, March 25
simple interest
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
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.
pg. 2
, March 25
The Rule of 72
Ans: 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
Ans: 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
pg. 3
, March 25
Ans: 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
Ans: 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
pg. 4
