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D076 Module 4 REVIEW A+
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3 components of interest rate, or required rate - opportunity cost, risk, and inflation 3 different names used for interest rate - discount rate, required rate, cost 9f capital compound interest - interest earned on both the principal amount and any interest already earned Inflation - is the rat...

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  • February 2, 2024
  • 2
  • 2023/2024
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D076 Module 4 REVIEW A+
3 components of interest rate, or required rate - ✔✔opportunity cost, risk, and inflation



3 different names used for interest rate - ✔✔discount rate, required rate, cost 9f capital



compound interest - ✔✔interest earned on both the principal amount and any interest already earned



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 loans



opportunity cost - ✔✔is the loss of potential gain



Risk - ✔✔is the possibility that the actual return will differ from the expected return



simple interest - ✔✔interest paid on the principal alone



Suppose 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.



What does the risk-free rate indicate? - ✔✔Inflation and opportunity cost

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