Although Counterintuitive, What Is the Reason for a Risk Free

question 22

Multiple Choice

Although counterintuitive, what is the reason for a risk free asset providing a rate of return?

• A) Time preference
• B) Compensating for idiosyncratic risk
• C) Creating a market for the instrument
• D) Diversification

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Definitions:

Fiat Money

Currency that a government has declared to be legal tender, despite it having no intrinsic value or being backed by a physical commodity.

Liability

A legal financial obligation or debt that an entity owes to another entity, required to be settled through the transfer of assets, provision of services, or other financial settlement.

Federal Reserve Note

The official paper currency of the United States, issued by the Federal Reserve, and the most common form of U.S. banknotes in circulation.

Token Money

Money whose face value exceeds its cost of production, typically involving coins and paper money not backed by a commodity.