Question

What is the cost of money? The interest rate? And how much do you pay for money? A house mortgage might be 6% or less. A credit card might be 18% or more. A late fee might be $25 per month on a $1000 balance. You've have to do the math on that one. Or the furniture store that has "no interest financing for 3 years." How do they do that? How would the price change if you paid cash today? The difference is the cost of money for the furniture.

Choose an item that costs money and lets figure out the cost of that money.

Answer #1

Cost of money is nothing but the interest which could be earned if the amount invested in business was instead channelized into government bonds and securities.

Let's look at this from a small business' perspective. Assume they have acquired a loan of $30,000 for an equipment at a rate of 10% annual interest. This amounts close to 0.027% interest per day. In simple, $8.1 amount of interest per day. For a month, the interest amount come out to be $8.1×30 = $243, which is nothing but the cost of money. Had the business invested the inital amount in a government bond with the same interest rate, they would have received payments or in short earned $243 as interest which is nothing but the cost of money in this case.

Hope this helps. Cheers!

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