Question

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: All things being equal, rational savers and investors prefer to invest in an asset that provides a 12% return rather than one that provides an 8% return.
Statement 2: All things being equal, savers and investors prefer more risk to less risk and prefer lower risk premiums on projects exhibiting higher levels of risk.
Statement 3: On average and everything else held constant, borrowers will attempt to pay the maximum possible cash flows that will motivate savers and investors to participate in the transaction.
Statement 4: All things being equal, savers and investors expect to receive some amount of maturity premium as compensation for their deferred consumption.
The true statements are:______.
a. 1, 2, and 3.
b. 1 and 3.
c. 2 and 4.
d. 1, 2, 3, and 4.

Answer 1

Answer:

b. 1 and 3.

Explanation:

The investors are of two types either they are risk averse or risk seekers. Risk averse are those who are not willing to take risks for their investments. They accept lower returns but they are not ready to take more risks than their appetite. Risk seekers are those who demand more risk for more returns. The risks level is so high that even their whole investments can go away but they take this risk to achieve high extra ordinary returns.