FI 412 Exam 1 Questions and Answers Latest Update 2025-2026
Interest Rate - Answers Cost of borrowing or return on lending
Federal Funds Rate - Answers Rate set by the Federal Reserve influencing borrowing costs
Yield to Maturity (YTM) - Answers Interest rate equating bond price with future cash flows
Present Value (PV) - Answers Evaluation of cash flows considering timing and magnitude
Fixed-Payment Loan - Answers Equal payments of principal and interest over term
Coupon Bond - Answers Regular interest payments until maturity, then principal repaid
Discount Bond - Answers Sold below face value, repaid at maturity without interest
Bond Price and YTM Relationship - Answers Inverse relationship; higher YTM leads to lower
bond prices
Coupon Rate - Answers Annual interest payment as a percentage of face value
Par Value - Answers Face value of the bond repaid at maturity
Real Interest Rate - Answers Nominal rate adjusted for expected inflation changes
Nominal Interest Rate - Answers Stated rate without inflation adjustment
Current Yield - Answers Annual coupon payment divided by bond price
Capital Gain Yield - Answers Price change of the bond over time
Maturity and Returns - Answers Maturity equals holding period yields stable returns
Interest Rate Risk - Answers Risk of bond price changes due to interest rate fluctuations
Duration - Answers Measures bond's sensitivity to interest rate changes
Reinvestment Risk - Answers Risk of reinvesting returns at uncertain rates
Demand Curve - Answers Downward sloping; lower prices attract more investors.
Supply Curve - Answers Upward sloping; higher prices encourage more issuers.
Market Equilibrium - Answers Quantity demanded equals quantity supplied.
Excess Supply - Answers More bonds supplied than demanded; prices drop.
Excess Demand - Answers More bonds demanded than supplied; prices rise.
Rightward Shift in Demand - Answers Increased demand due to economic expansion.
, Leftward Shift in Demand - Answers Decreased demand due to economic recession.
Rightward Shift in Supply - Answers Increased supply from higher investment profitability.
Leftward Shift in Supply - Answers Decreased supply due to economic recession.
Impact of Inflation - Answers Higher inflation shifts demand left, supply right.
Default Risk - Answers Higher default risk raises yield relative to risk-free.
Liquidity - Answers Greater liquidity lowers yields and increases desirability.
Income Tax Considerations - Answers Tax-exempt bonds have lower yields due to advantages.
Pure Expectations Theory - Answers Long-term rates reflect expectations of future short-term
rates.
Market Segmentation Theory - Answers Rates determined by supply and demand in maturity
segments.
Liquidity Premium Theory - Answers Long-term rates include average expected short-term rates
plus premium.
Economic Expansion - Answers Increased wealth leads to higher bond demand.
Economic Recession - Answers Decreased wealth leads to lower bond demand.
Government Borrowing - Answers Increased borrowing shifts supply right.
Interest Rate Forecasting - Answers Predicts economic strength and investment profitability.
Conducting monetary policy - Answers The process by which the Federal Reserve manages the
money supply and interest rates to achieve economic objectives.
Promoting financial system stability - Answers Efforts by the Federal Reserve to maintain a
stable financial system and prevent systemic risks.
Supervising and regulating financial institutions and activities - Answers The oversight of banks
and other financial entities to ensure compliance with laws and regulations.
Fostering payment and settlement system safety and efficiency - Answers Ensuring that
payment systems operate smoothly and securely for the economy.
Promoting consumer protection and community development - Answers Initiatives aimed at
safeguarding consumers in financial transactions and supporting community growth.
Board of Governors (BoG) - Answers The main governing body of the Federal Reserve System,
consisting of members appointed by the President.
Interest Rate - Answers Cost of borrowing or return on lending
Federal Funds Rate - Answers Rate set by the Federal Reserve influencing borrowing costs
Yield to Maturity (YTM) - Answers Interest rate equating bond price with future cash flows
Present Value (PV) - Answers Evaluation of cash flows considering timing and magnitude
Fixed-Payment Loan - Answers Equal payments of principal and interest over term
Coupon Bond - Answers Regular interest payments until maturity, then principal repaid
Discount Bond - Answers Sold below face value, repaid at maturity without interest
Bond Price and YTM Relationship - Answers Inverse relationship; higher YTM leads to lower
bond prices
Coupon Rate - Answers Annual interest payment as a percentage of face value
Par Value - Answers Face value of the bond repaid at maturity
Real Interest Rate - Answers Nominal rate adjusted for expected inflation changes
Nominal Interest Rate - Answers Stated rate without inflation adjustment
Current Yield - Answers Annual coupon payment divided by bond price
Capital Gain Yield - Answers Price change of the bond over time
Maturity and Returns - Answers Maturity equals holding period yields stable returns
Interest Rate Risk - Answers Risk of bond price changes due to interest rate fluctuations
Duration - Answers Measures bond's sensitivity to interest rate changes
Reinvestment Risk - Answers Risk of reinvesting returns at uncertain rates
Demand Curve - Answers Downward sloping; lower prices attract more investors.
Supply Curve - Answers Upward sloping; higher prices encourage more issuers.
Market Equilibrium - Answers Quantity demanded equals quantity supplied.
Excess Supply - Answers More bonds supplied than demanded; prices drop.
Excess Demand - Answers More bonds demanded than supplied; prices rise.
Rightward Shift in Demand - Answers Increased demand due to economic expansion.
, Leftward Shift in Demand - Answers Decreased demand due to economic recession.
Rightward Shift in Supply - Answers Increased supply from higher investment profitability.
Leftward Shift in Supply - Answers Decreased supply due to economic recession.
Impact of Inflation - Answers Higher inflation shifts demand left, supply right.
Default Risk - Answers Higher default risk raises yield relative to risk-free.
Liquidity - Answers Greater liquidity lowers yields and increases desirability.
Income Tax Considerations - Answers Tax-exempt bonds have lower yields due to advantages.
Pure Expectations Theory - Answers Long-term rates reflect expectations of future short-term
rates.
Market Segmentation Theory - Answers Rates determined by supply and demand in maturity
segments.
Liquidity Premium Theory - Answers Long-term rates include average expected short-term rates
plus premium.
Economic Expansion - Answers Increased wealth leads to higher bond demand.
Economic Recession - Answers Decreased wealth leads to lower bond demand.
Government Borrowing - Answers Increased borrowing shifts supply right.
Interest Rate Forecasting - Answers Predicts economic strength and investment profitability.
Conducting monetary policy - Answers The process by which the Federal Reserve manages the
money supply and interest rates to achieve economic objectives.
Promoting financial system stability - Answers Efforts by the Federal Reserve to maintain a
stable financial system and prevent systemic risks.
Supervising and regulating financial institutions and activities - Answers The oversight of banks
and other financial entities to ensure compliance with laws and regulations.
Fostering payment and settlement system safety and efficiency - Answers Ensuring that
payment systems operate smoothly and securely for the economy.
Promoting consumer protection and community development - Answers Initiatives aimed at
safeguarding consumers in financial transactions and supporting community growth.
Board of Governors (BoG) - Answers The main governing body of the Federal Reserve System,
consisting of members appointed by the President.
