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3. Cost of money Four fundamental factors affect the cost of money: (1) the return that borrowers expect to earn on their investments, (2) the
3. Cost of money Four fundamental factors affect the cost of money: (1) the return that borrowers expect to earn on their investments, (2) the preference of savers to spend their income in the current period rather than delay their consumption until some future period, (3) the risks associated with the investment, and (4) expected inflation. Consider the following statements that address these factors, and indicate which you think are true. Statement 1: On average and everything else held constant, it is generally assumed that savers and investors prefer immediate consumption to deferred, or postponed, spending. statement 2: All else being equal, the more highly that savers and investors prefer immediate spending to deferred consumption, the lower the compensation that savers and investor will require to induce them to make an investment that will necessitate postponed spending. Statement 3: For the average rational Investor or saver, there is a direct, or positive, relationship between the amount of risk exhibited by a security and the risk premium that would be required by the investor or saver Statement 4: The Inflation premium used to calculate the nominal interest rate on a five-year security should be equal to the rate of inflation expected in year 5 of the investment. The true statements are: 1 and 3 O 1, 2, 3, and 4 O 1, 2, and 3 O2 and 4
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