Question

A hypothetical interest rate whose only function is to compensate lenders for the opportunities they forgo by not having access to the loaned funds is called the ______.

Answer 1

An interest rate that is hypothetical and has the singular function of showing the returns that lenders forego when they don't have access to the loaned funds is pure rate of interest.

What is the pure rate of interest?

The pure interest rate is a rate that is found in perfectly competitive markets and relates to foregone profit.

This rate might be hypothetical but it functions to show how much returns those who loan money would gain if they had access to the money they loaned to a loanee.

This rate is impractical however because it assumes a world where there is no risk which is simply not possible.

In conclusion, this is the pure rate of interest.

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