Because of the risk/return tradeoff, small businesses that borrow money repay it with interest at the ________.
A)prime interest rate
B)prime interest rate minus a few percentage points
C)prime interest rate plus a few percentage points
D)lender's cost of capital

Question

Quizplus · Accepted Answer

Small businesses represent a higher risk for lenders as compared to larger businesses or established firms. Hence, lenders charge a higher interest rate than the prime rate, to cover the risk associated with a small business loan. This interest rate is typically the prime interest rate plus a few percentage points, allowing lenders to earn a higher return on the loan and offset the risk involved in lending to small businesses. Therefore, the correct answer is C.

Because of the Risk/return Tradeoff, Small Businesses That Borrow Money