Final answer:
An arbitrage opportunity is when you can profit from price differences without risk, such as borrowing at a lower interest rate and saving at a higher one. Stocks generally offer higher returns than bonds and savings accounts. High-risk investments offer the chance for higher returns but also greater potential for loss.
Step-by-step explanation:
An arbitrage opportunity exists if you are able to take advantage of price differences to make a profit without risk. Considering the choices provided, an arbitrage opportunity would be present if the bank offers you a loan at 4% interest and a savings account that pays 5% interest. This is because you can borrow money at a lower rate of interest and invest it in a savings account that yields a higher rate of interest, thereby securing a guaranteed profit without risk.
Concerning the other topics addressed:
- Stocks typically have a higher average return over time compared to bonds and savings accounts, but they come with higher risk.
- A high-risk investment does not necessarily guarantee low returns; in fact, high risk often comes with the potential for high returns, though it also means there is a greater chance of losing money.
- The total simple interest from a $5,000 loan at a 6% interest rate over three years would be $900 (6% of $5,000 is $300 per year for three years).
- If you receive $500 in simple interest on a $10,000 loan for five years, the annual interest rate you charged would be 1%.