Yield to maturity (YTM) is the internal rate of return on a bond if it is held to maturity and all coupons are reinvested at the YTM rate. It is a promised yield, not a guaranteed realized yield, because it depends on the reinvestment assumption. The other options describe specific scenarios (constant credit spread, bond being called, linear price convergence) that are not inherent assumptions in the standard YTM calculation.

The current ratio is Current Assets / Current Liabilities. Inventory is a key component of current assets. In a period of rising costs, FIFO (Company B) reports older, lower costs in Cost of Goods Sold (COGS), leaving newer, higher costs in ending inventory. LIFO (Company A) reports newer, higher costs in COGS, leaving older, lower costs in ending inventory. Therefore, all else equal, the inventory value (and thus current assets) on the balance sheet will be higher for the company using FIFO, leading to a higher current ratio.

The Gordon growth model (a version of the dividend discount model for perpetual growth) is V0 = D1 / (r – g), where D1 is the next expected dividend, r is the required rate of return, and g is the constant growth rate. Plugging in the numbers: V0 = $2.00 / (0.08 – 0.03) = $2.00 / 0.05 = $40.00.

The key driver of diversification benefits in MPT is the correlation between asset returns. Adding an asset with a low or negative correlation to the existing portfolio provides the greatest potential to reduce overall portfolio volatility (risk) for a given level of expected return. While lower volatility or higher return of the new asset are desirable, they do not directly capture the fundamental benefit of combining assets whose prices do not move in lockstep.

A central bank’s policy rate directly influences short-term interest rates. An unexpected increase will cause yields on short-term government bonds to rise immediately. Long-term yields are influenced more by long-term inflation expectations and growth prospects; they may also rise but typically by a smaller amount in response to a single policy move aimed at curbing near-term inflation. This differential movement (short rates up more than long rates) leads to a flattening of the yield curve.

FCFF starts with net income, which includes the $200k gain on sale. Since this gain is not an operating cash flow, it must be subtracted. The cash flow statement correctly shows the $500k cash proceeds as an investing inflow. For FCFF, we are reconciling net income to operating cash flow (hence subtracting the non-cash gain) and then accounting for investing activities (which includes the $500k inflow). The net effect for FCFF calculation is: NI – Gain + D&A – ΔWC – CapEx + Proceeds from asset sales. The $500k is part of the ‘Proceeds from asset sales’ component.

When choosing between mutually exclusive projects, the correct decision rule is to select the project with the higher NPV. NPV measures the absolute dollar contribution to shareholder wealth. IRR can be misleading in cases of scale differences or timing differences in cash flows. Here, Project Y adds $300,000 more value to the firm than Project X, despite having a lower IRR. Maximizing NPV is consistent with the goal of maximizing firm value.

Duration is a measure of a bond’s price sensitivity to interest rate changes. For a zero-coupon bond, Macaulay duration is equal to its time to maturity. For a coupon bond, duration is less than maturity because some cash flows (coupons) are received earlier. Therefore, for the same maturity, the zero-coupon bond has the higher duration and is more sensitive to interest rate changes. The shape of the yield curve does not change this fundamental relationship.

Standard II(B): Market Manipulation prohibits practices that distort prices or trading volume with the intent to mislead market participants. Spreading false information to move a price for personal gain is a clear example of market manipulation (specifically, information-based manipulation). A large trade that moves the market (trade-based manipulation) may be permissible if it is a bona fide transaction. Bona fide investing and research-based recommendations are not manipulative.

Yield to maturity (YTM) is the internal rate of return on a bond if it is held to maturity and all coupons are reinvested at the YTM rate. It is a promised yield, not a guaranteed realized yield, because it depends on the reinvestment assumption. The other options describe specific scenarios (constant credit spread, bond being called, linear price convergence) that are not inherent assumptions in the standard YTM calculation.0