What term means the difference in interest rates in financing arrangements?

What term means the difference in interest rates in financing arrangements?

• A. Hypothecation
• B. Arbitrage
• C. Promissory note
• D. Redemption

Answer: (B)

Arbitrage is about exploiting differences in rates or prices across financing options to lock in a risk-free profit. When you can borrow at a lower interest rate and lend at a higher rate, or when a spread exists between two financing or investment opportunities, that gap is arbitrage. The opportunity comes from the mismatch in costs and returns, allowing a participant to profit without additional risk by taking advantage of that rate differential. Hypothecation means pledging property as security for a loan; a promissory note is simply a written promise to pay; redemption is the act of paying off a debt or redeeming a security.

Arbitrage is about exploiting differences in rates or prices across financing options to lock in a risk-free profit. When you can borrow at a lower interest rate and lend at a higher rate, or when a spread exists between two financing or investment opportunities, that gap is arbitrage. The opportunity comes from the mismatch in costs and returns, allowing a participant to profit without additional risk by taking advantage of that rate differential.

Hypothecation means pledging property as security for a loan; a promissory note is simply a written promise to pay; redemption is the act of paying off a debt or redeeming a security.