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Sample Topics

### Dividend policy

A set of guidelines company managers follow to distribute the earnings of the company to its shareholders. Few companies follow stable dividend policy where few companies follow regular dividend policy. In most of the stance’s companies distribute dividend considering the investment requirement and the sentiment of investors and the market.
Sample Questions:

1. The indifference policy advocates that –

a. dividend policy is irrelevant.

b. dividend policy is irrelevant as long as the firm’s investment policy is modified for dividend changes.

c. firms are indifferent to dividend policy, but stockholders are not.

d. dividends are irrelevant.

e. stockholders are indifferent to dividend policy only as long as dividends are held constant.

### Interest rate swap

In a swap agreement, the parties agree to pay and receive interest on notional value. The notional value does not transfer from one party to other. The cash flows occur in terms of interest. One party pay at fixed interest rate whereas, the another pay at floating interest rate.
Sample Questions:

1. Consider the following interest rate swap scenario: notional =\$10MM, actual days in quarter=92, annualized floating rate = 2.5400%, and annualized fixed rate = 2.5400%. What is the floating leg payment?

a. \$62,088.89

b .\$65,0911.89

c. \$64,911.11

d. \$127,000

2. If the fixed payment is greater than the floating payment, then

a. The net received by the long interest rate swap position will be position

b. The net received by the long interest rate swap position will be negative

c. The net received by the long interest rate swap position will be zero

d. The net received by the long interest rate swap position will be 100% of the notional principal

### Changes in price level and its effect

In general, the price level changes indicate the inflation or deflation in the economy. The changes in price level affect the cost of input and the price of output. Also, it affects the interest rate in the economy and to be demanded by the lenders. This is because lenders are more interested in inflation free interest rate.
Sample Questions:

Which of the following statements is correct?

a. Along a Marshallian demand curve, the level of utility is held constant and the level of income changes. Consequently, movements along this demand curve illustrate only substitution effects of price changes.

b. Along a compensated (Hicksian) demand curve, the level of utility is held constant and the level of income changes. Consequently, movements along this demand curve illustrate only substitution effects of price changes.

c. Along a Marshallian demand curve, both the level of utility and the level of income are held constant. Consequently, movements along this demand curve illustrate only substitution effects of price changes.

d. Along a compensated (Hicksian) demand curve, both the level of utility and the level of income are held constant. Consequently, movements along this demand curve illustrate both substitution effect and income effect of price changes.

### Interest rate parity

The interest rate parity theory is used to determine the forward exchange rate between the two currencies, using the prevailing interest rate in the country of both currencies in respect of spot exchange rate.
Sample Questions:

1. Define interest rate parity.

2. What is the relationship between interest rate parity and forward rates ?

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