Chapter 6, End of Chapter, Self-Test Questions and Problems, Exercise ST-1
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Define each of the following terms:


a.  Production opportunities; time preferences for consumption; risk; inflation

b.  Real risk-free rate of interest, r*; nominal (quoted) risk-free rate of interest, rRF

c.  Inflation premium (IP)

d.  Default risk premium (DRP)

e.  Liquidity premium (LP); maturity risk premium (MRP)

f.   Interest rate risk; reinvestment rate risk

g.  Term structure of interest rates; yield curve

h.  "Normal" yield curve; inverted ("abnormal") yield curve; humped yield curve

i.   Pure expectations theory

j.   Foreign trade deficit

Here is a tip:

Congress felt there was a need for additional investor protections against inaccurate information from companies. 


In 2002, Congress passed this act to protect shareholders, employees and the public from accounting errors and fraudulent financial practices. There were 3 key provisions:

  1. Overhauling incentives and independence in the audit process.
  2. Providing harsher penalties for providing false information.
  3. Requiring companies to validate their internal financial control processes.

Verified Answer

The Sarbanes-Oxley act, passed by Congress in 2002, is intended to improve the accuracy of information which is made public by both board members and shareholders of public companies.

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