A friend comes to you and asks you to invest in his business instead of investing in Treasury bonds. You think he has a good business model, so you tell him you are willing to invest as long as the expected return on the investment is at least four times the return you would have received on the Treasury bonds.

Determine which of these fundamental factors is affecting the cost of money in the scenario described:

Risk

Time preferences for consumption

Inflation

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

Higher inflation leads to lower interest rates.

Higher risk leads to lower interest rates.

Interest is the price paid to borrow funds.