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 4. Expected inflation Consider the following statements that address these factors, and indicate if you think each statement is true or false. Statement True False All things being equal, rational savers and investors prefer to invest in an asset that provides a 12% return rather than one that provides an 8% return. O O Historical inflation rates, as opposed to expected future rates of inflation, should be used when calculating an investment's nominal risk-free rate of return. o The longer the period of deferred consumption, the larger will be the maturity premium that savers and investors expect to receive, everything else held constant. o It is a mathematical impossibility for the expected future inflation rate to be greater than the real risk-free rate of return on an investment. o For the average rational investor or saver, there is an indirect, or inverse, relationship between the amount of risk exhibited by a security and the risk premium that would be required by the investor or saver. o O o