Certified Financial Management Specialist Practice Exam

Which plot shows the interest rates for different loan durations?

1. Line graph

2. Yield Curve

3. Pareto chart

4. Histogram

The correct answer is: Yield Curve

The yield curve is the correct representation of interest rates for different loan durations because it visually depicts the relationship between the interest rates and the time to maturity of debt securities, such as loans or bonds. It typically illustrates how interest rates vary based on the length of time until a borrowed amount is repaid. A yield curve typically slopes upward, indicating that longer-term loans tend to have higher interest rates than shorter-term loans due to factors like increased risk and inflation expectations over time. It allows financial analysts and investors to assess economic conditions and make informed decisions regarding borrowing and investing. In contrast, a line graph is generally used to show trends over time across a single variable or multiple related variables, but it doesn’t specifically illustrate the same nuances in interest rates for varying durations as effectively as a yield curve. A Pareto chart emphasizes the frequency of problems or causes in a situation rather than financial data relationships, and a histogram represents the distribution of numerical data but does not convey the relationship between interest rates and loan durations in the way a yield curve does. Thus, the yield curve is the most informative graphical representation for analyzing interest rates across various loan durations.