SOFA-CFE · Question #77
The price of money consists of which elements?
The correct answer is D. All of the above. Option D is correct because the price of money - essentially the interest rate - is built from all three components together, not just one. Each of A, B, and C is individually true, which is exactly what makes "All of the above" the complete answer. Intrinsic value (A) is the…
Question
The price of money consists of which elements?
Options
- Aintrinsic value of money
- Binflation premium
- Crisk premium
- DAll of the above
How the community answered
(36 responses)- A3% (1)
- B11% (4)
- C6% (2)
- D81% (29)
Explanation
Option D is correct because the price of money - essentially the interest rate - is built from all three components together, not just one. Each of A, B, and C is individually true, which is exactly what makes "All of the above" the complete answer.
- Intrinsic value (A) is the real risk-free rate: pure compensation for lending money over time, even in a world with no inflation or risk.
- Inflation premium (B) compensates lenders for the erosion of purchasing power - a dollar repaid in the future buys less than a dollar today.
- Risk premium (C) covers default risk, liquidity risk, and maturity risk - extra return demanded for the possibility things go wrong.
Memory tip: Use the acronym IIR - Intrinsic value + Inflation + Risk = Interest rate. When you see "price of money," think of interest as a sandwich: the intrinsic value is the bread, inflation and risk are the fillings - you need all of it together.
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