Which of the following costs serves to compensate the lender for loss of liquidity?
A)administrative costs of making the loan
B)cost of paying for the risk involved
C)cost to offset the likelihood of inflation
D)cost for use of money during the period of the loan

Question

Quizplus · Accepted Answer

The cost for use of money during the period of the loan is the interest rate, which compensates the lender for the loss of liquidity since they are lending out money that they would otherwise have available to them. This cost serves as compensation for the lender's inability to use, invest or spend their money during the period of the loan. Administrative costs (A) serve to cover the costs associated with processing the loan while the cost of paying for risk (B) serves to compensate the lender for the possibility of loss due to default. The cost to offset the likelihood of inflation (C) serves to compensate for the potential decrease in the value of the dollars that they receive at the end of the loan term.

Which of the Following Costs Serves to Compensate the Lender