Question

1.      (True/False. Explain) Longer the duration of the loan, higher the interest rate.

2.      (True/False. Explain) higher the risk of the loan, lower the interest rate.

3.      (True/False. Explain) $1 today is worth more than $1 tomorrow.

4.      What is Initial Public Offering (IPO)? Can you buy one from another investor?

5.      What is crowdfunding?

Answer 1

Answer to Part 1)

If a bank were to give you a loan for a longer period of time, usually the interest charged on the same is relatively higher than short term loans. This is to accommodate for the fact that the risk of operating and giving away loans to such people is relatively on the higher side. Thus, true is the correct option.

Answer to Part 2)

If the risk of default is high, the interest rate would automatically rise. If banks assume that the risk factor is higher for them meaning, that the loan may lead to a default, the try and maximize their profits right from the start of the loan to ensure that their investment is protected as much as possible.

The correct answer to the question thus is false as a higher risk of loan increases the interest rate.

Answer to Part 3)

It is indeed true that a 1$ today is worth more than 1$ in the future. This is because over a period of time, inflation makes things expensive to purchase, as a result of which the value of money in the market declines.

In the market it is referred to as consumer price index which gives us the rate at which money declines in value in time as a measure of inflation.

Answer to Part 4)

An initial Public Offer happens, when a company starts trading its shares for the first time in any industry. To raise capital when a private company looks towards people for investments, it is then that an IPO is established. A share gives you a right over the company and its asset. You cannot directly purchase shares from investors in an IPO as it is a direct transaction between a company and an investor respectively.

Answer to Part 5)

Crowd Funding takes place in the form of donations to form a new company or promote a new innovation which is then backed up by the general public. The idea in itself seems so great that the people or organizations come forward to ensure that the same can be converted into a commercially available product.

This usually happens over the internet.

Please feel free to ask your doubts in the comments section.