D076 Module 4 Questions and Answers
100% Pass
3 different names used for interest rate ✔✔discount rate, required rate, cost 9f capital
simple interest ✔✔interest paid on the principal alone
compound interest ✔✔intere
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D076 Module 4 Questions and Answers
100% Pass
3 different names used for interest rate ✔✔discount rate, required rate, cost 9f capital
simple interest ✔✔interest paid on the principal alone
compound interest ✔✔interest earned on both the principal amount and any interest already
earned
opportunity cost ✔✔is the loss of potential gain
Risk ✔✔is the possibility that the actual return will differ from the expected return
Inflation ✔✔is the rate at which the average price level of goods and services increases
Interest rate is also called ✔✔required rate of return when it refers to the compensation that an
investor or lender will accept for investments such as stocks, bonds, or loans
3 components of interest rate, or required rate ✔✔opportunity cost, risk, and inflation
You just inherited $25,000 from a long-lost relative. You decide to put the money in a savings
account for the time being. What would be considered an opportunity cost of putting the money
in savings? ✔✔Buying a brand new car worth $25,000
Which component of an interest rate is an indicator of inflation and opportunity cost? ✔✔Riskfree rate
What is the name for the interest rate expressed on an annual basis? ✔✔Compound interest
Why is the required rate of return also known as the hurdle rate? ✔✔It is the minimum rate that a
firm must surpass to accept a project.
What is the inflation rate? ✔✔The rate at which the average price level of a basket of goods and
services in an economy increases
What does the risk-free rate indicate? ✔✔Inflation and opportunity cost
Suppose Sophia is considering a new stock investment for her retirement account. This stock has
significant risk, but is quite popular in the market. Inflation for the next few years is expected to
be 2-3% per year, and the current U.S. Treasury rates are about 2%. How should she use this
information to decide what type of return she can expect from the stock? ✔✔Based on the
inflation rate, she should expect this stock to provide a return higher than this for the associated
risk.
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