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Fundamentals of Financial Management 15th Edition

Fundamentals of Financial Management (15th Edition)

Book Edition15th Edition
PublisherCengage Learning
Section 11-3: Internal Rate of Return (IRR)
Section 11-10: Decision Criteria Used in Practice
End of Chapter
Chapter 11, Section 11-3, SelfTest, Exercise 05
Page 394

In what sense is a project's IRR similar to the YTM on a bond?

Here is a tip:

The calculations for finding internal rates of return (IRRs) and bond yields are similar.


The yield to maturity on a bond is the rate of return the investor will earn based on its price and the amount received in future payments (the required rate of return). These are similar principles to the internal rate of return concept in the project as the price would be comparable to the cost of the project, and the future payments would be comparable to the cash flows from the project.

Verified Answer

A project's internal rate of return (IRR) is the discount rate that forces the net present value to equal zero. This is the same as forcing the present value of bond cash flows equal to the current bond price. Therefore, the project's IRR is the equivalent of the yield to maturity on a bond.

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