Four fundamental factors affect the cost of money:
(1) the return that borrowers expect to earn on their investments,
(2) the preference of savers to spend their income in the current period rather than delay their consumption until some future period,
(3) the risks associated with the investment, and
(4) expected inflation.

Consider the following statements that address these factors, and indicate which you think are true.

Statement 1: The onset of inflation results in a loss of purchasing power when an investment pays constant cash flows.
Statement 2: Investments providing cash flows that are more likely to equal their expected value are said to exhibit more risk.
Statement 3: For the average rational investor or saver, there is a direct, or positive, relationship between the amount of risk exhibited by a security and the risk premium that would be required by the investor or saver.
Statement 4: The inflation premium used to calculate the nominal interest rate on a five-year security should be equal to the rate of inflation expected in year 5 of the investment.