Q Search this course Chapter 5 Assignment 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, and (4) expected inflation. Consider the following statements that address these factors, and indicate which you think are true. Statement 1: The actual relationship premium (1P) Is actualy multiplicative-that is, t()x( IP)-1-but it is often simplified to reflect an additive relationship. Statement 2: Historical inflation rates, as opposed to expected future rates of inflation, should be used when calculating an investment's nominal risk-free rate of return. Statement 3. An investment that can provide a 10% return should attract more investment capital than an otherwise identical investment that can only provide a 6% return Statement 4: All things being and investors exhibiting higher levels of risk. the risk-free rate of return (r") and the expected future inflation rate or inflation equal, savers and investors prefer more risk to less risk and prefer lower risk premiums on projects The true statements are 1, 2, and 3 1, 2, 3, and 4 2 and 4 1 and 3