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 faise. Statement True On average and everything else held constant, rational savers and investors prefer to invest 51,500 to acquire an asset that will pay annual cash flows of $300 per year rather than an otherwise identical asset that will pay $500 per year: On average and everything else held constant, 30-year U.S. Treasury bonds should expect to exhibit a smaller maturity, premium then a 1-year U.S, Treasury bili. For the average rational investor or saver, there is a direct, or positive, relationship between the amount of risk exhlbited by a Consider the following statements that address these factors, and indicate if you think each statement is true or false. Statement On average and everything else held constant, rational savers and investors prefer to invest $1,500 to acquire an asset that will pay annual cash flows of $300 per year rather than an otherwise identical asset that will pay $500 per year. On average and everything else held constant, 30-year U.S. Treasury bonds should expect to exhibit a smaller maturity premium than a 1-year U.S. Treasury bill. 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 premlum that would be required by the investor or saver. The longer the period of deferred consumption, the larger will be the maturity premium that savers and investors expect to recelve, everything else held constant. Investments providing cash flows that are more likely to equal their expected value are said to exhibit more risk. Grade it Now Save 8 Continue