AGEC 4040 MIDTERM 2 EXAM
QUESTIONS WITH 100% CORRECT
ANSWERS | LATEST VERSION 2025/2026.
Inflation - ANS rising trend in the prices of most goods and services
liquidity preference - ANS investors prefer short term (more liquid) securities
Interest rates - ANS compensation paid by the borrower to the lender; cost of borrowing
funds
What determines interest rates - ANS the interaction of supply and demand
required return - ANS the cost of funds obtained by selling an ownership interest
negative interest rates - ANS lender essentially pays interest to the borrower
nominal rate of interest - ANS actual rate of interest charged by supplier and paid by
demander
real rate of interest - ANS increase in purchasing power that the investment provides
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, yield curve - ANS relationship between the maturity and rate of return for bonds with similar
levels of risk (graph)
Yield to Maturity (YTM) - ANS compound annual rate of return earned on a debt security
purchased on a given day and held to maturity; estimate of market's required return
normal yield curve - ANS upward sloping; long-term interest rates are higher than short-term
investerd yield curve - ANS downward sloping; short-term interest rates are higher than
long-term (cheaper to get long-term)
flat yield curve - ANS indicates that interest rates do not vary much at different maturities
deflation - ANS trend of falling prices
expectations theory - ANS the yield curve accounts for upcoming changes
what does an expectation of rising interest rates result in - ANS upward sloping (normal)
what does an expectation of declining interest rates result in - ANS downward sloping
(inverted)
liquidity preference theory - ANS investors perceive short-term investments as more liquid
and less risky; long-term bonds get higher rates to entice investors
market segmentation theory - ANS the market for loans is segmented on the basis of
maturity
what is the safest investment - ANS U.S. Treasury bills
2 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
QUESTIONS WITH 100% CORRECT
ANSWERS | LATEST VERSION 2025/2026.
Inflation - ANS rising trend in the prices of most goods and services
liquidity preference - ANS investors prefer short term (more liquid) securities
Interest rates - ANS compensation paid by the borrower to the lender; cost of borrowing
funds
What determines interest rates - ANS the interaction of supply and demand
required return - ANS the cost of funds obtained by selling an ownership interest
negative interest rates - ANS lender essentially pays interest to the borrower
nominal rate of interest - ANS actual rate of interest charged by supplier and paid by
demander
real rate of interest - ANS increase in purchasing power that the investment provides
1 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
, yield curve - ANS relationship between the maturity and rate of return for bonds with similar
levels of risk (graph)
Yield to Maturity (YTM) - ANS compound annual rate of return earned on a debt security
purchased on a given day and held to maturity; estimate of market's required return
normal yield curve - ANS upward sloping; long-term interest rates are higher than short-term
investerd yield curve - ANS downward sloping; short-term interest rates are higher than
long-term (cheaper to get long-term)
flat yield curve - ANS indicates that interest rates do not vary much at different maturities
deflation - ANS trend of falling prices
expectations theory - ANS the yield curve accounts for upcoming changes
what does an expectation of rising interest rates result in - ANS upward sloping (normal)
what does an expectation of declining interest rates result in - ANS downward sloping
(inverted)
liquidity preference theory - ANS investors perceive short-term investments as more liquid
and less risky; long-term bonds get higher rates to entice investors
market segmentation theory - ANS the market for loans is segmented on the basis of
maturity
what is the safest investment - ANS U.S. Treasury bills
2 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
