{"id":28741,"date":"2021-09-03T00:51:57","date_gmt":"2021-09-03T00:51:57","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=28741"},"modified":"2026-03-11T16:08:38","modified_gmt":"2026-03-11T16:08:38","slug":"interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/","title":{"rendered":"Interest Rates as Required Rates of Return, Discount Rates, and Opportunity Costs"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which concept interprets the interest rate as the benefit foregone from current consumption?\",\n    \"text\": \"Which of the following is most likely an interpretation of interest rate as a benefit foregone when investors spend money on current consumption instead of saving or investing?\\n\\nA. Discount rate\\nB. Opportunity cost\\nC. Required rate of return\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B. Opportunity cost refers to the interest foregone when investors choose current consumption instead of saving or investing. It represents the benefit sacrificed by not selecting the next best alternative.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<p><iframe loading=\"lazy\" src=\"https:\/\/www.youtube.com\/embed\/-ffCJF1kmqo\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n\n\n\n<p>The time value of money is a concept that states that cash received today is more valuable than cash received in the future. If a person agrees to receive payment in the future, he foregoes the option of earning interest if he invests that amount of money today. In other words, cash received today is more valuable due to inflation. It is imperative to remember that inflation tends to reduce the purchasing power of money over time.<\/p>\n\n\n\n<p>Assume that someone has $100 now. If the person invests the money in a bank account, it will earn him interest. Note, however, that the interest will depend on the rate of return offered by government bonds (risk-free assets), inflation, liquidity risk, default risk, time to maturity, and other factors.<\/p>\n\n\n\n<div style=\"background:#f3f4f6; padding:16px 14px; border-radius:12px; margin:20px 0; text-align:center;\">\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"\n     style=\"display:inline-flex; align-items:center; justify-content:center; padding:12px 18px; border:2px solid #1d4ed8; border-radius:999px; color:#1d4ed8; text-decoration:none; font-weight:600; font-size:16px; line-height:1; background:#ffffff; white-space:nowrap;\">\n    Refine your required return and discount rate reasoning with free practice\n  <\/a>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Application of Time Value of Money<\/strong><\/h2>\n\n\n\n<p>The time value of money concept has a wide range of applications in finance, including bonds valuation, shares valuation, loan facilities pricing, and capital budgeting.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Key Components of Time Value of Money<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Discount rate or interest rate<\/strong>: The rate of discounting or compounding that you apply to an amount of money to calculate its present or future value.<\/li>\n\n\n\n<li>Time periods: The whole number of time periods over which a sum&#8217;s present or future value is being calculated. These time periods can be annually, semi-annually, quarterly, monthly, weekly, etc.<\/li>\n\n\n\n<li><strong>Present value (PV)<\/strong>: The amount of money you have today (or at time T = 0) is referred to as the present value.<\/li>\n\n\n\n<li><strong>Future value (FV)<\/strong>: The accumulated amount of money you get after investing the original sum at a certain interest rate and for a given time period, say, two years.<\/li>\n<\/ul>\n\n\n\n<p>There are three ways to interpret interest rates:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Required rate of return<\/strong>: The minimum return that an investor expects to earn to postpone their current consumption.<\/li>\n\n\n\n<li><strong>Discount rate<\/strong>: The rate used to discount future cash flows in order to determine the present value.<\/li>\n\n\n\n<li><strong>Opportunity cost<\/strong>: The interest foregone when investors spend money on current consumption rather than saving or investing their money.<\/li>\n<\/ol>\n\n\n\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n\n\n\n<p>Which of the following is&nbsp;<em>most likely&nbsp;<\/em>an interpretation of interest rate as a benefit foregone when investors spend money on current consumption instead of saving or investing?<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>Discount rate.<\/li>\n\n\n\n<li>Opportunity cost.<strong>&nbsp;<\/strong><\/li>\n\n\n\n<li>Required rate of return.<\/li>\n<\/ol>\n\n\n\n<p><strong>Solution<\/strong><\/p>\n\n\n\n<p>The correct answer is&nbsp;<strong>B<\/strong>.<\/p>\n\n\n\n<p>Opportunity cost is a key factor in interpreting interest rates. It refers to the interest foregone when investors opt for an alternate option, such as spending on current consumption instead of saving or investing.<\/p>\n\n\n\n<p><strong>A is incorrect<\/strong>.<strong>&nbsp;<\/strong>The discount rate refers to the interest rate used to discount future cash flows to reach the present value.<\/p>\n\n\n\n<p><strong>C is incorrect<\/strong>.&nbsp;Required rate of return is the minimum rate of return an investor would wish to earn to postpone current consumption.<\/p>\n\n\n\n<div style=\"background:#f3f4f6; padding:22px 18px; border-radius:14px; margin:30px 0; text-align:center;\">\n  <div style=\"font-size:17px; line-height:1.4; margin-bottom:14px; color:#111827; font-weight:600;\">\n    Ready to apply discount rates, opportunity cost, and time value concepts in exam-style scenarios?\n  <\/div>\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"\n     style=\"display:inline-flex; align-items:center; justify-content:center; padding:14px 24px; border-radius:999px; background:#1d4ed8; color:#ffffff; text-decoration:none; font-weight:700; font-size:17px; line-height:1;\">\n    Start Free Trial \u2192\n  <\/a>\n\n  <div style=\"margin-top: 12px; font-size: 16px; color: #333333;\">\n    Practice CFA quant questions and lock in key concepts.\n  <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>The time value of money is a concept that states that cash received today is more valuable than cash received in the future. If a person agrees to receive payment in the future, he foregoes the option of earning interest&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2],"tags":[],"class_list":["post-28741","post","type-post","status-publish","format-standard","hentry","category-quantitative-methods","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Interest Rates: Return, Discount &amp; Opportunity Costs | CFA<\/title>\n<meta name=\"description\" content=\"Explore how interest rates function as required returns, discount rates, and opportunity costs in time value of money and investment decisions.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Interest Rates: Return, Discount &amp; Opportunity Costs | CFA\" \/>\n<meta property=\"og:description\" content=\"Explore how interest rates function as required returns, discount rates, and opportunity costs in time value of money and investment decisions.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2021-09-03T00:51:57+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-03-11T16:08:38+00:00\" \/>\n<meta name=\"author\" content=\"Kosikos Tuitoek\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Kosikos Tuitoek\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/quantitative-methods\\\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/quantitative-methods\\\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\\\/\"},\"author\":{\"name\":\"Kosikos Tuitoek\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#\\\/schema\\\/person\\\/73df713e3b6e82ee139e1eff20cebe20\"},\"headline\":\"Interest Rates as Required Rates of Return, Discount Rates, and Opportunity Costs\",\"datePublished\":\"2021-09-03T00:51:57+00:00\",\"dateModified\":\"2026-03-11T16:08:38+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/quantitative-methods\\\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\\\/\"},\"wordCount\":510,\"articleSection\":[\"Quantitative Methods\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/quantitative-methods\\\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\\\/\",\"url\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/quantitative-methods\\\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\\\/\",\"name\":\"Interest Rates: Return, Discount & Opportunity Costs | CFA\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#website\"},\"datePublished\":\"2021-09-03T00:51:57+00:00\",\"dateModified\":\"2026-03-11T16:08:38+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#\\\/schema\\\/person\\\/73df713e3b6e82ee139e1eff20cebe20\"},\"description\":\"Explore how interest rates function as required returns, discount rates, and opportunity costs in time value of money and investment decisions.\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/quantitative-methods\\\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/quantitative-methods\\\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/quantitative-methods\\\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Interest Rates as Required Rates of Return, Discount Rates, and Opportunity Costs\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#website\",\"url\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#\\\/schema\\\/person\\\/73df713e3b6e82ee139e1eff20cebe20\",\"name\":\"Kosikos Tuitoek\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"url\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"contentUrl\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"caption\":\"Kosikos Tuitoek\"},\"url\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/author\\\/kosikos-tuitoek-enockanalystprep-com\\\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/-ffCJF1kmqo\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"3251\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2021-09-03T00:51:57+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Interest Rates: Return, Discount & Opportunity Costs | CFA","description":"Explore how interest rates function as required returns, discount rates, and opportunity costs in time value of money and investment decisions.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/","og_locale":"en_US","og_type":"article","og_title":"Interest Rates: Return, Discount & Opportunity Costs | CFA","og_description":"Explore how interest rates function as required returns, discount rates, and opportunity costs in time value of money and investment decisions.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2021-09-03T00:51:57+00:00","article_modified_time":"2026-03-11T16:08:38+00:00","author":"Kosikos Tuitoek","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Kosikos Tuitoek","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/"},"author":{"name":"Kosikos Tuitoek","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20"},"headline":"Interest Rates as Required Rates of Return, Discount Rates, and Opportunity Costs","datePublished":"2021-09-03T00:51:57+00:00","dateModified":"2026-03-11T16:08:38+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/"},"wordCount":510,"articleSection":["Quantitative Methods"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/","name":"Interest Rates: Return, Discount & Opportunity Costs | CFA","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2021-09-03T00:51:57+00:00","dateModified":"2026-03-11T16:08:38+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20"},"description":"Explore how interest rates function as required returns, discount rates, and opportunity costs in time value of money and investment decisions.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/quantitative-methods\/interest-rates-as-required-rates-of-return-discount-rates-and-opportunity-costs\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Interest Rates as Required Rates of Return, Discount Rates, and Opportunity Costs"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20","name":"Kosikos Tuitoek","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","caption":"Kosikos Tuitoek"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kosikos-tuitoek-enockanalystprep-com\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/-ffCJF1kmqo","og_video_type":"text\/html","og_video_duration":"3251","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2021-09-03T00:51:57+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/28741","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=28741"}],"version-history":[{"count":70,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/28741\/revisions"}],"predecessor-version":[{"id":59676,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/28741\/revisions\/59676"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=28741"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=28741"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=28741"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}