Question

You can also think of interest as:

A. the time it takes a bond to mature.

B. All of these statements are true.

C. the price of borrowing per dollar

D. the cost of inflation

Answer 1

Interest is defined as the amount the borrower has to pay the lender for the use of lender's fund. In other words it is the cost / price of borrowing.

For example:

Suppose it is given that interest rate is 5% per year. This means that if a person borrows $100 for 1year then after 1 year the borrower has to pay back the lender the principal amount i.e $100 and also a interest payment equal to 5% of $100 (principal amount) i.e $5. Hence the borrower paid additional $5 for use of lender's $100. Thus the cost/price of using $100 is $5 or in other words the cost /price of using $1 of lender's money is $0.05 .

So based on above definition interest is the cost/ price paid for borrowing from the lender.

So correct answer is option (c) .