Question

12. Why would lenders be less willing to lend money in an economic downturn? 13. What is the difference between fixed and variable rate interest rates? 14. What is the relationship between risk and return? How do we calculate this relationship?

Answer 1

12. Lenders are less willing to lend money in an economic downturn.

1. Generally lenders verify that whether the borrowers have the ability to repay a loan or not.

2. An economic downturn can escalating credit losses due to which lenders are scrutinizing loan quality, securing long-term financing and cutting costs.

3. During an economic downturn, the person taking out the loan has a higher chance of losing their job so it makes lender less willing to lend money in such circumstances.

4. Also during an economic downturn, there are lot of risk associated so it makes lender less willing to lend money in such circumstances.

13. Difference between fixed and variable rate interest rates.

1. Under fixed interest rates, loans have interest rates that stay the same for the entire duration of the loan, while under variable rate, it has interest rate that changes over time.

2. Variable rate loans generally have lower interest rates than fixed rate loans.

3. Fixed-rates are better for longer-term loans than variable ones.

4. Variable-rate loans are generally riskier than fixed-term loans.

14. Relationship between risk and return.

1. Generally, there is a positive relationship between risk and return as The higher the return of an investment, the higher the risk.

2. There should be an appropriate risk-return combination that would depend on the financial objectives. Some people prefer a low-risk while others prefer taking on more risk for the chance of making higher returns.

3. There must be a right balance of risk and return while making an investment.

4. The relationship between risk and return is directly proportional to each other.

5. The amount of risk determines the degree of return.