7. Cost of money

Everyone uses money, and it is important to understand what factors affect the cost of money.

Consider the following scenario:

Due to recent political and economic events, general prices of goods and services are expected to increase significantly over the next five years. You were about to purchase a five-year bond. You now require a higher return on the bond than you did before you found out about these expected price increases.

Based on your understanding of the factors that affect the cost of money, identify which of the following statements is true:

Interest is the price paid to borrow funds.

Higher risk leads to lower interest rates.

Higher inflation leads to lower interest rates.