Certified Financial Management Specialist Practice Exam

Which of the following represents a payment for borrowing money?

1. Loan

2. Deposit

3. Interest

4. Investment

The correct answer is: Interest

The answer identifies "Interest" as a payment for borrowing money because interest is the cost incurred by a borrower for the use of funds they do not own. When a borrower takes out a loan, they agree to repay not only the principal amount but also the interest charged by the lender. This interest compensates the lender for the risk taken and for the opportunity cost of lending money instead of using it for other investments. Each of the other options does not directly represent a payment for borrowing money. A loan itself is the actual amount borrowed, while a deposit refers to funds placed into an account, signifying assets instead of obligations. An investment typically involves funds allocated to generate returns, rather than payments associated with borrowing. Thus, "Interest" stands out as the correct answer, clearly representing the cost of borrowing money.