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LOMA 308 Module 3 Study Guide with Complete Solutions Interest on investments, 3 factors affect their growth - Answer️️ -1. Interest rate 2. The type of interest 3. The time period during which the invested principal earns interest Interest rates - Answer️️ -Remember that interest is a...

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  • September 15, 2024
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  • 2024/2025
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LOMA 308 Module 3 Study Guide with
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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.




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,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 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.




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,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.

Steadfast Insurance can use the Rule of 72 to

A. Estimate how fast a principal sum doubles at a specified compound interest rate


©SOPHIABENNETT 2024/2025
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, 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.

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