University of Central Florida (UCF) ECO3223 Money and Banking Practice Exam 1

A risk-free asset is characterized by having a known future value or a guaranteed return, which makes it free from the uncertainty typically associated with other forms of investments. The most common example of a risk-free asset is government bonds from stable countries, like U.S. Treasury bills, which are backed by the government's ability to repay debt. Investors in risk-free assets can be certain about the returns they will receive at maturity, allowing for predictability in financial planning.

In the context of the other choices, options that describe assets with fluctuating values or subject to high risk do not align with the definition of risk-free investments, as they inherently carry uncertainty and potential for loss. An investment returning market rates may not be risk-free either, as market fluctuations and economic conditions can affect returns. The characteristic of a known and guaranteed future value distinctly separates risk-free assets from other types of investments that might involve varying degrees of risk.