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 i
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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 loans3 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 costSuppose 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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