ECO4223 EXAM 2 STUDY GUIDE
2026/2027 COMPLETE QUESTIONS
WITH VERIFIED CORRECT ANSWERS ||
100% GUARANTEED PASS
<NEWEST VERSION>
1. Risk Structure of Interest rate - ANSWER ✔ The relationship among the
various interest rates on bonds with the same term to maturity.
e.g: A 10yr bond from Coca Cola vs. a 10yr bond from ABC Inc.
Factors include: Default Risk; Liquidity; Taxes
2. Default Risk - ANSWER ✔ The risk that the issuer may not be able to honor
a bond. The issuer can not make interest payments or pay face value at
maturity
3. Risk Premium - ANSWER ✔ The difference between investmenting in a
risky asset and a risk-free investment.
Liquidity is also a factor. The less liquid assets have a higher premium.
4. Example of Risk Premium - ANSWER ✔ T-Bill = 3% Coke = 5%
, There is a 2% Risk Premium on the Coke bond because it has more risk than
the T-Bill.
5yr bond = 5% 1yr bond = 2%
There is a 3% Risk Premium on the 5yr Bond
5. Sovereign Debt - ANSWER ✔ Bonds issued by a National Gov.
6. Private Equity Firms (Venture Capital) - ANSWER ✔ Money that is
invested in new or emerging companies that are perceived as having great
profit potential
7. S.E.C. - ANSWER ✔ Security Exchange Commission;1934
1) Reduce Asymmetric Information (Prospectus)
2) Monitor Compliance
3) restrict "insider" trading
8. How do Banks reduce asymmetric information, adverse selection, moral
hazard? - ANSWER ✔ 1) Screening Borrowers
2) Collateral & Net Worth
3) Covenant & Monitoring
4) Interest Rate
9. Banks 1) Screening Borrowers - ANSWER ✔ Used to reduce Adverse
Selection. The free-rider problem is reduced because the Bank is the only
one benefiting from the information. The Bank also has the benefit of
economy of scale.
, 10.Line of Credit - ANSWER ✔ A pre-established amount that can be
borrowed on demand with no collateral.
11.Bank 2) Collateral & Net Worth - ANSWER ✔ A valuable asset that is
pledged to ensure loan payments.
1) Reduce the loss if default
2) Reduce the risk of default
12.Bank 3) Covenant & Monitoring - ANSWER ✔ Restriction on the borrower
to reduce default risk such as requiring a Compensating balance.
13.Compensating balance - ANSWER ✔ A requirement by some banks
requiring depositors to maintain minimum cash balances in their bank
accounts.
14.Bank 4) Interest Rate - ANSWER ✔ Safer borrower pay less Interest rate.
Bank may also chose to Credit Rationing.
15.Credit Rationing - ANSWER ✔ the restricting of credit by lenders such that
borrowers cannot obtain the funds at any interest rate. (refuse to lend to that
borrower)
16.During a recession, the supply of bonds______, and the supply curve shifts
to the___________, everything else held constant.
a. increases; right
b. decreases; left
c. increases; left
d. decreases; right - ANSWER ✔ decreases; left
2026/2027 COMPLETE QUESTIONS
WITH VERIFIED CORRECT ANSWERS ||
100% GUARANTEED PASS
<NEWEST VERSION>
1. Risk Structure of Interest rate - ANSWER ✔ The relationship among the
various interest rates on bonds with the same term to maturity.
e.g: A 10yr bond from Coca Cola vs. a 10yr bond from ABC Inc.
Factors include: Default Risk; Liquidity; Taxes
2. Default Risk - ANSWER ✔ The risk that the issuer may not be able to honor
a bond. The issuer can not make interest payments or pay face value at
maturity
3. Risk Premium - ANSWER ✔ The difference between investmenting in a
risky asset and a risk-free investment.
Liquidity is also a factor. The less liquid assets have a higher premium.
4. Example of Risk Premium - ANSWER ✔ T-Bill = 3% Coke = 5%
, There is a 2% Risk Premium on the Coke bond because it has more risk than
the T-Bill.
5yr bond = 5% 1yr bond = 2%
There is a 3% Risk Premium on the 5yr Bond
5. Sovereign Debt - ANSWER ✔ Bonds issued by a National Gov.
6. Private Equity Firms (Venture Capital) - ANSWER ✔ Money that is
invested in new or emerging companies that are perceived as having great
profit potential
7. S.E.C. - ANSWER ✔ Security Exchange Commission;1934
1) Reduce Asymmetric Information (Prospectus)
2) Monitor Compliance
3) restrict "insider" trading
8. How do Banks reduce asymmetric information, adverse selection, moral
hazard? - ANSWER ✔ 1) Screening Borrowers
2) Collateral & Net Worth
3) Covenant & Monitoring
4) Interest Rate
9. Banks 1) Screening Borrowers - ANSWER ✔ Used to reduce Adverse
Selection. The free-rider problem is reduced because the Bank is the only
one benefiting from the information. The Bank also has the benefit of
economy of scale.
, 10.Line of Credit - ANSWER ✔ A pre-established amount that can be
borrowed on demand with no collateral.
11.Bank 2) Collateral & Net Worth - ANSWER ✔ A valuable asset that is
pledged to ensure loan payments.
1) Reduce the loss if default
2) Reduce the risk of default
12.Bank 3) Covenant & Monitoring - ANSWER ✔ Restriction on the borrower
to reduce default risk such as requiring a Compensating balance.
13.Compensating balance - ANSWER ✔ A requirement by some banks
requiring depositors to maintain minimum cash balances in their bank
accounts.
14.Bank 4) Interest Rate - ANSWER ✔ Safer borrower pay less Interest rate.
Bank may also chose to Credit Rationing.
15.Credit Rationing - ANSWER ✔ the restricting of credit by lenders such that
borrowers cannot obtain the funds at any interest rate. (refuse to lend to that
borrower)
16.During a recession, the supply of bonds______, and the supply curve shifts
to the___________, everything else held constant.
a. increases; right
b. decreases; left
c. increases; left
d. decreases; right - ANSWER ✔ decreases; left
