Question

1. What four fundamental factors affect the cost of money?

Answer 1

Cost of money refers to the real rate of interest at which you are able to borrow money . It is influenced by following factors :-

1.) Expected inflation - inflation reduces the purchasing power and it needs to be compensated for.

2.) Liquidity - it is the loss in value if the investment is to be converted into cash quickly

3) Default risk - the probability that the money is not returned back and it needs to be compensated

4) Maturity risk - as the maturity of debt increases its sensitivity to changes in interest rate increases holding all else constant.

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answered by: anonymous