CFA Practice Question

CFA Practice Question

A positive relationship exists between the real growth rate in the economy and the real risk-free rate. This is because ______
A. borrowers in strong economic times should not have as high cost of funds because economic strength bodes well for their success, lowering the risk of lending: this causes a decrease in the RFR.
B. a high real growth rate lowers the price of money/cost of funds thus raising the real RFR.
C. the investment opportunities available in the economy are determined by the inflation rate and the real growth rate. When fast growth occurs, investment opportunities change, lenders require, higher returns, and borrowers are able to pay a higher rate.
Explanation: The investment opportunities available in the economy are determined by the inflation rate and the real growth rate. When fast growth occurs, investment opportunities change, lenders require, higher returns (because there are so many other profitable investments available), and borrowers are able to pay a higher rate (because of strong economic growth).

User Contributed Comments 6

User Comment
dskim116 good explanation!
CFunder A lot of value add on this explanation.
indrayudha yeah, totally
daikokuyaramen sometimes i definitely feel swindled when i think i paid for this...lol
Mikehuynh Nice question
marattus one of the best explanations!
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