AGEC 4040 Midterm 2 Exam Questions and Answers Already Passed Latest Update 2025-
2026
Inflation - Answers rising trend in the prices of most goods and services
liquidity preference - Answers investors prefer short term (more liquid) securities
Interest rates - Answers compensation paid by the borrower to the lender; cost of borrowing
funds
What determines interest rates - Answers the interaction of supply and demand
required return - Answers the cost of funds obtained by selling an ownership interest
negative interest rates - Answers lender essentially pays interest to the borrower
nominal rate of interest - Answers actual rate of interest charged by supplier and paid by
demander
real rate of interest - Answers increase in purchasing power that the investment provides
yield curve - Answers relationship between the maturity and rate of return for bonds with similar
levels of risk (graph)
Yield to Maturity (YTM) - Answers 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 - Answers upward sloping; long-term interest rates are higher than short-term
investerd yield curve - Answers downward sloping; short-term interest rates are higher than long
-term (cheaper to get long-term)
flat yield curve - Answers indicates that interest rates do not vary much at different maturities
deflation - Answers trend of falling prices
expectations theory - Answers the yield curve accounts for upcoming changes
what does an expectation of rising interest rates result in - Answers upward sloping (normal)
what does an expectation of declining interest rates result in - Answers downward sloping
(inverted)
liquidity preference theory - Answers investors perceive short-term investments as more liquid
and less risky; long-term bonds get higher rates to entice investors
market segmentation theory - Answers the market for loans is segmented on the basis of
maturity
, what is the safest investment - Answers U.S. Treasury bills
who benefits more from lower interest rates - Answers smaller companies since debt becomes
cheaper
default risk - Answers possibility that the issuer of debt will not pay (greater = higher risk
premium)
contractual provision risk - Answers Conditions that are often included in a debt agreement or a
stock issue.
municipal bond - Answers a bond issued by a state or local government
corporate bond - Answers long-term debt instrument indicating that a corporation has borrowed
and promises to repay
Why are bonds useful? - Answers they allow you to raise a lot of money as a debt to investors
Par/Face value - Answers the principal amount of a bond that is repaid at the end of the term;
value that interest payments are based on
coupon rate - Answers percentage of a bond's par value that will be paid annually for interest
impact of the cost of money - Answers The cost of money in the capital market is the basis for
determining a bond's coupon rate
current yield - Answers bond's cash return for the year (annual PMT/Price)
Yield to Maturity - Answers how much you will make if you keep the bond until maturity
Yield to Call (YTC) - Answers a bond can be called under certain conditions
bond prices - Answers these are not usually readily available to individuals
coupon/contract rate - Answers what is paid
yield - Answers what you actually make
bond ratings - Answers independent agencies assess and rate the bonds
valuation - Answers process that links risk and return to determine the worth of an asset
bonds - Answers long term debt instruments used by business and governments to raise large
sums of money
changes in bond values - Answers when the required return rises, the bond price falls and vice
versa (inverse relationship)
discount - Answers a bond sells below its par value (PV down, R up); lower price since there's
2026
Inflation - Answers rising trend in the prices of most goods and services
liquidity preference - Answers investors prefer short term (more liquid) securities
Interest rates - Answers compensation paid by the borrower to the lender; cost of borrowing
funds
What determines interest rates - Answers the interaction of supply and demand
required return - Answers the cost of funds obtained by selling an ownership interest
negative interest rates - Answers lender essentially pays interest to the borrower
nominal rate of interest - Answers actual rate of interest charged by supplier and paid by
demander
real rate of interest - Answers increase in purchasing power that the investment provides
yield curve - Answers relationship between the maturity and rate of return for bonds with similar
levels of risk (graph)
Yield to Maturity (YTM) - Answers 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 - Answers upward sloping; long-term interest rates are higher than short-term
investerd yield curve - Answers downward sloping; short-term interest rates are higher than long
-term (cheaper to get long-term)
flat yield curve - Answers indicates that interest rates do not vary much at different maturities
deflation - Answers trend of falling prices
expectations theory - Answers the yield curve accounts for upcoming changes
what does an expectation of rising interest rates result in - Answers upward sloping (normal)
what does an expectation of declining interest rates result in - Answers downward sloping
(inverted)
liquidity preference theory - Answers investors perceive short-term investments as more liquid
and less risky; long-term bonds get higher rates to entice investors
market segmentation theory - Answers the market for loans is segmented on the basis of
maturity
, what is the safest investment - Answers U.S. Treasury bills
who benefits more from lower interest rates - Answers smaller companies since debt becomes
cheaper
default risk - Answers possibility that the issuer of debt will not pay (greater = higher risk
premium)
contractual provision risk - Answers Conditions that are often included in a debt agreement or a
stock issue.
municipal bond - Answers a bond issued by a state or local government
corporate bond - Answers long-term debt instrument indicating that a corporation has borrowed
and promises to repay
Why are bonds useful? - Answers they allow you to raise a lot of money as a debt to investors
Par/Face value - Answers the principal amount of a bond that is repaid at the end of the term;
value that interest payments are based on
coupon rate - Answers percentage of a bond's par value that will be paid annually for interest
impact of the cost of money - Answers The cost of money in the capital market is the basis for
determining a bond's coupon rate
current yield - Answers bond's cash return for the year (annual PMT/Price)
Yield to Maturity - Answers how much you will make if you keep the bond until maturity
Yield to Call (YTC) - Answers a bond can be called under certain conditions
bond prices - Answers these are not usually readily available to individuals
coupon/contract rate - Answers what is paid
yield - Answers what you actually make
bond ratings - Answers independent agencies assess and rate the bonds
valuation - Answers process that links risk and return to determine the worth of an asset
bonds - Answers long term debt instruments used by business and governments to raise large
sums of money
changes in bond values - Answers when the required return rises, the bond price falls and vice
versa (inverse relationship)
discount - Answers a bond sells below its par value (PV down, R up); lower price since there's
