Final answer:
Interest income and dividends are both forms of rate of return, which reflects the gains from an investment. Interest is earned on money lent or saved, and dividends are distributed by companies. When investing, financial investors consider the interest rate based on the opportunity cost and risk prospects.
Step-by-step explanation:
Both interest income and dividends contribute to the rate of return on an investment. Interest income is generated from lending money or depositing funds in interest-bearing accounts, while dividends are paid to shareholders from a company's profits. Investors seek to maximize their rate of return, which could be through receiving periodic interest, dividends, or capital gains from selling the investment at a higher price than it was purchased.
The interest rate chosen by a financial investor to value future payments from investments, like dividends and interest income, reflects the opportunity cost of investing capital and includes a risk premium. Therefore, a savvy investor must weigh the potential interest against other investment opportunities and assess the associated risk levels before allocating financial resources.
In summary, when a company issues stock or when an individual lends money, the expectation is that there will be a financial reward. This comes in the form of either interest from the loan or dividends from stocks, both of which are components of the investment's overall rate of return.