Question

Q. Interest on a corporate loan compensates the lender for:

A. risk only.
B. opportunity cost only.
C. both risk and opportunity cost.​

Answer 1

C. both risk and opportunity cost.​

Step-by-step explanation:

Lenders have different interest rates for different clients and loan types. How they arrive at the different interest rates depends on the lender's internal factors. Generally, a lender considers the following in determining interest rates

• The cost of funds being loaned out, whether customer deposits or from the markets.
• The risk of a customer defaulting
• The lender's profit margin
• The cost of administering the loan

The lender's profit margin represents the opportunity cost element. A lender has to consider how many profits other investing options would generate aside from issuing out the loan.