D076 Unit 3 WRITTEN EXAM PASSED

What is the term for the percentage of the principal that a lender charges a borrower for the use of assets? - Interest rate How is the interest rate expressed? - as a percentage What is the main purpose of charging interest? - It allows borrowers to pay to use the assets of another entity to accomplish their own goals. What is a component of the required rate of return? - Opportunity cost Why would a long-term investment require a higher rate of return? - There is greater risk involved and a higher opportunity cost. 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 Today, he pulled out $15,000 from his account to buy the car, but the price of the car is now $16,562. Which component of the required rate of return did Ahmed forget to consider? - Inflation Why is built-in inflation linked to adaptive expectations? - Workers want higher wages to keep their standard of living as prices increase, which pushes the prices even higher. What is the compensation for risk given to investors called? - Risk Premium Which type of interest rate is the rate at which invested money grows for a certain period time? - Nominal Rate