BAFB$1013$ Principles of Finance

PART B: TRUE and FALSE

Answer all questions in the answer sheet below. $0\mathrm{.}5$ mark for each correct answer.

$(5$ MARKS$)$

Risk premium is added to the quoted interest rate to compensate for the risk of default by the borrower.

A more liquid investment typically carries a higher liquidity premium.

The maturity premium compensates for the uncertainty and risk associated with longer investment horizons.

If the real interest rate is $3\%,$ the expected inflation rate is $2\%,$ the risk premium is $1\%,$ the liquidity premium is $0\mathrm{.}5\%,$ and the maturity premium is $0\mathrm{.}5\%,$ then the quoted interest rate would be $5\%.$

The cost of money is primarily reflected by the interest rate.

For borrowers, the cost of money is the return they earn on the capital they provide.

For lenders or investors, the cost of money is the return they earn on the capital they provide.

The interest rate does not account for the time value of money.

Higher interest rates decrease the cost of borrowing.

The cost of money includes factors such as the time value of money, inflation, and risks associated with lending.