factors affect the cost of money: (1) the return that borrowers expect to earn o

Question

factors affect the cost of money: (1) the return that borrowers expect to earn on their investments, (2) the preference of savers to Four fundamental spend their Income in the current perod 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 false. 1: rates, as opposed to expected future rates of inflation, should be used when investment's nominal risk-free rate of return Statement 2: On average and everything else held constant, an investment that can provide a 4% retum should attract more capital from savers/investors than an otherwise identical investment that can generate a 12% return. Statement 3: Projects Z10 and A20 are otherwise identical investments from Project A20 are twice as likely to be realized as those expected from Project Z10. This Project A20. except for one important difference: The cash flows expected means that Project Z10 is more risky than Statement 4: For the average rational Investor or saver, there s an indirect, or inverse, rel exhbited by a security and the risk premium that would be required by the investor or saver. The false statements are: 3and 4 O 1,2,and 4 O 1 and 2 O 2 and 4

Explanation / Answer

the third statement is correct

statement 1 is incorrect since expected rates should be used

statement 4 is incorrect since the relationship is direct

ans: 1, 2 and 4

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