Question

A lender demands an interest rate in part to compensate for any expected ___________, so that the money that is repaid in the future will have at least as much buying power as the money that was originally loaned. risk premium inflation compound interest opportunity costs

Answer 1

I would say that at least in part the interest rate for lending money would be to cover the cost of inflation during the loan repayment period.If, for example, $10,000 was loaned at an interest rate of 3% then that would yield $300 interest and presumable in one year it is not inconceivable that the inflation could go up this much.