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.

Roberto recently started a new business with money that he collected from his friends and family. All other factors being equal, which of the following financing options has a higher cost for someone who needs capital to start a business?

a. Veronica invested in Robertos business and expects to earn a 10% rate of return every year for the next two years, irrespective of how much debt financing Roberto uses.

b.Sheila expects to earn a return of 10% on her investment in Robertos business for the next two years, but restricts Roberto to not finance his business with debt beyond 40% of the total capital needed.