Four fundamental factors affect the cost of money: (1) the return that borrowers

Question

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: On average and everything else held constant, 30-year U.S. Treasury bonds should expect to exhibit a smaller maturity premium than a 1-year U.S. Treasury bill. Statement 2: All things being equal, savers and investors expect to receive some amount of maturity premium as compensation for their deferred consumption. Statement 3: 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 4: A risk-free asset is one characterized by guaranteed returns, whereas the cash flows of a risky asset may be greater or less than the expected or promised returns. The true statements are: 2 and 3 1 and 3 1 and 4 2 and 4

Explanation / Answer

option 1 and 4 is the right answer.

Treasury bills are issued are by the goverment with smaller maturity premium of 1 year and risk free asset is the asset with gauranteed return and which shows minimum loss .

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