BCOR 2204 - Finance Final Practice Quizzes with
Correct Answers
Bonds
Debt issued by companies or state, local, and federal governments.
Factors that Influence Equilibrium Interest Rate
Inflation
Risk
Liquidity Preference
R*
Real Rate of Interest
Real Rate of Interest
The rate that creates equilibrium between the supply of savings and the demand for investment
funds. Changes with changing economic conditions, tastes, and preferences.
R_1
Nominal Rate of Interest
R_f + R_p
Nominal Rate of Interest
The actual rate of interest charged by the supplier of funds and paid by the demander.
R_f
Risk-Free Rate of Return
, RP_1
Risk Premium Rate of Return
Inflation Premium (IP)
A premium equal to expected inflation that investors add to the risk-free rate of return.
Term Structure of Interest Rates
The relationship between the maturity and the rate of returns for bonds with similar levels of
risk.
Yield to Maturity (YTM)
The compounded annual rate of return investors earn if they buy a bond at a specific price and
hold it until maturity.
Yield Curve
A graph showing the relationship between bond yields and maturities.
Inverted Yield Curve
A downward sloping yield curve that indicates that short term interest rates are generally higher
than long term interest rates.
Flat Yield Curve
A yield curve that indicates that interest rates do not vary much at different maturities.
Normal Yield Curve
Correct Answers
Bonds
Debt issued by companies or state, local, and federal governments.
Factors that Influence Equilibrium Interest Rate
Inflation
Risk
Liquidity Preference
R*
Real Rate of Interest
Real Rate of Interest
The rate that creates equilibrium between the supply of savings and the demand for investment
funds. Changes with changing economic conditions, tastes, and preferences.
R_1
Nominal Rate of Interest
R_f + R_p
Nominal Rate of Interest
The actual rate of interest charged by the supplier of funds and paid by the demander.
R_f
Risk-Free Rate of Return
, RP_1
Risk Premium Rate of Return
Inflation Premium (IP)
A premium equal to expected inflation that investors add to the risk-free rate of return.
Term Structure of Interest Rates
The relationship between the maturity and the rate of returns for bonds with similar levels of
risk.
Yield to Maturity (YTM)
The compounded annual rate of return investors earn if they buy a bond at a specific price and
hold it until maturity.
Yield Curve
A graph showing the relationship between bond yields and maturities.
Inverted Yield Curve
A downward sloping yield curve that indicates that short term interest rates are generally higher
than long term interest rates.
Flat Yield Curve
A yield curve that indicates that interest rates do not vary much at different maturities.
Normal Yield Curve
