Fundamentals of Business Intelligence (FBI) Practice Exam

Which statement is true about interest?

1. The interest rate for a bond is always fixed

2. Interest is only applicable to loans

3. Interest is the cost of borrowing money

4. Interest has no relation to bonds

The correct answer is: Interest is the cost of borrowing money

The statement that interest is the cost of borrowing money is true and captures the fundamental nature of interest within financial transactions. Interest represents the compensation that borrowers pay to lenders for the use of their money over a period of time. It is typically calculated as a percentage of the amount borrowed, known as the principal. This concept applies broadly, not only to personal loans but also to corporate loans, mortgages, and other forms of financing. Understanding interest as a cost is essential because it highlights one of the key aspects of borrowing: the implications for repayment. Borrowers must not only return the principal amount but also pay back the interest, which affects the total amount that ultimately needs to be repaid. This principle underpins both personal finances and corporate financing, affecting decisions ranging from budgeting to investment strategy. In contrast, other statements do not accurately capture the broader context of interest. For instance, interest rates for bonds can vary based on market conditions and the issuer's creditworthiness, meaning they are not always fixed. Additionally, interest is applicable to a variety of financial instruments, not just loans, including bonds, credit cards, and savings accounts. Lastly, interest is intrinsically linked to bonds, as bondholders receive interest payments, also known as coupon payments, making