Question

Of the terms below, which are various references to opportunity cost - that "i" in the time value calculations we have worked through? Choose all that apply.

1) interest rate
2) required return
3) yield to maturity
4) coupon rate
5) WACC
6) GDP growth rate
7) heart rate
8) Batman
9) Sir Patrick Stewart

Answer 1

Various references to opportunity cost include interest rate(1), required return(2), yield to maturity(3), and WACC(5), which are considered by financial investors to value future payments based on possible investment alternatives and associated risks.

Step-by-step explanation:

The terms which reference opportunity cost and correspond to the 'i' in time value calculations are:

• Interest rate(1)
• Required return(2)
• Yield to maturity(3)
• WACC (Weighted Average Cost of Capital)(5)

These terms are used by a financial investor to determine what future payments are worth in the present by considering the opportunity cost of investing financial capital. They reflect the rate of return on other available financial investment opportunities and may include a risk premium depending on the perceived risk of the investment.

Opportunity cost measures cost by what is foregone in exchange, which can be in terms of money, time, or resources. For instance, if the opportunity cost is seen in terms of alternative investments, a financial investor may choose a 15% interest rate to reflect a higher rate than available elsewhere, due to higher associated risks. This value helps in assessing the present worth of future payments.