A risk premium associated with interest rates refers to: Multiple Choice higher earnings due to uncertainty of getting your money back lower consumer prices. the opportunity cost of borrowing the amortization period of your Ioan expected lower inflation.

Question

A risk premium associated with interest rates refers to: Multiple Choice higher earnings due to uncertainty of getting your money back lower consumer prices. the opportunity cost of borrowing the amortization period of your Ioan expected lower inflation.

Answer 1

###A. higher earnings due to uncertainty of getting your money back

Answer 2

##Step 1: Understanding Risk Premium###A risk premium is the additional return an investor expects to receive for taking on more risk. In the context of lending, it compensates the lender for the possibility of not getting their money back or the real value of the loan being eroded by inflation. This means the lender demands a higher interest rate to cover these risks.##Step 2: Relating Risk Premium to Interest Rates###The nominal interest rate includes the real interest rate (the return after adjusting for inflation) and the expected inflation rate. A risk premium is an additional component added to the nominal interest rate to account for the uncertainty of repayment. This uncertainty can stem from various factors, including the borrower's creditworthiness and unexpected inflation.##Step 3: Identifying the Correct Answer###The risk premium compensates for the uncertainty of getting your money back, which translates to higher earnings for the lender to offset this risk.#

Question

A risk premium associated with interest rates refers to: Multiple Choice higher earnings due to uncertainty of getting your money back lower consumer prices. the opportunity cost of borrowing the amortization period of your Ioan expected lower inflation.

Solution

Answer

Explanation