What are the cost of money?
The term 'cost of money' concerns interest that investors require for investing in risk assets because they have their money to withdraw their money in risk investments, such as government bonds or a guaranteed time contribution. The cost of money is a very important aspect of finance because they affect the prices of a large number of assets and investments. It dictates rates for which businesses can borrow to finance their activities and determine mortgage rates, student loan rates, credit card rates and many other forms of financing. The cost of cash rate or interest rate is affected by short -term central banks and government bond rates because they are used by all other as standards when lending, investing or lending money.
In order to take another level of risk, investors will require higher revenues, so the price of shares and bonds issued by corporations, for example, will be influenced. Investors RacionFor example, bonds issued by stable governments are guaranteed to pay a fixed interest rate, while corporations could go bankrupt due to many factors. For this reason, corporations will have to pay investors a higher interest rate to compensate for additional risk, which will also affect their lower lines. The cost of the cash rate is therefore determined to reflect the relationship of risk and return, which means that for low -resistant investment people will usually receive low returns and usually expect high yields for high risks.
In addition, when people use securities such as stocks and bonds, they use interest in government bonds as a reference scale and will be added risk bonuses, which is a return added to a risk -free rate. For example, if a ten -year government bond had a 5 % fixed rate and a 10 -year -old corporate bond had a 13 % rate, then the risk premium Would is 8 percent. In addition, a benchmark government bond and corporate bond will usually have the same lengthTo the maturity and the higher the risk bonus, the more risky the bond is. The cost of money is also bound to the fact that the value of the amount of money will reduce today in the future unless sufficient interest is obtained. In other words, the use of an example, $ 1 USD Dollr (USD) is more than $ 1 in the future unless there is a growing interest per $ 1.
In the modern economy, most people play all the roles of creditors, investors and debtors, and the cost of money is influenced in any way. For example, if a person puts money in the bank, the bank could pay him regular interest and at the same time the bank uses the amount to provide the loan to other individuals and institutions for its own purposes. Part of interest received from different types of credits provided by the bank will go to the depositor. The same deposit could also have a mortgage loan and/or credit card from the same bank.