Question

A friend comes to you and asks you to invest in his business instead of investing in Treasury bonds. You think he has a good business model, so you tell him you are willing to invest as long as the expected return on the investment is at least four times the return you would have received on the Treasury bonds. Determine which of these fundamental factors is affecting the cost of money in the scenario described:

0 O Inflation
O Risk
O Time preferences for consumption

Answer 1

The fundamental factor affecting the cost of money in the scenario described is risk. By setting the condition that the expected return on the investment should be at least four times the return on Treasury bonds, the investor is demanding a higher return to compensate for the higher risk associated with investing in a business.

Step-by-step explanation:

The fundamental factor affecting the cost of money in the scenario described is risk. While inflation and time preferences for consumption can also influence the cost of money, in this case, the decision to invest in the friend's business instead of Treasury bonds is based on the expectation of a higher return on investment.

By setting the condition that the expected return on the investment should be at least four times the return on Treasury bonds, the investor is demanding a higher return to compensate for the higher risk associated with investing in a business.

Answer 2

Step-by-step explanation:

• Treasury bonds are U.S government debt securities, that are fixed with a maturity period of 10 years. Having almost little or no risk. So investment in terms of Treasury bonds can be relatively safe.
• In the given scenario the fundamental factor affecting the cost of money could be Risk and Inflation
• As mentioned above T-bonds are almost risk-free which means safe and guaranteed returns, however business cannot be completely risk-free and you don't know how invested money would give returns or even not so there is a risk involved here.
• Inflation, as the word means, is a general increase in prices invariably leading to the downfall of purchasing value for money. Inflation is market dependent. As that will definitely have an impact on the cost of doing business and related factors.