IRR/NPV Question for all...

Which of the following is least accurate? a) In the study of bonds, the internal rate of return is synonymous with the yield to maturity b) The internal rate of return is the time-weighted rate of return on the portfolio, taking account of all cash flows c) Internal rates of returns and internal rate of return rankings are not affected by any external interest rate b/c a project’s cash flows alone determine the internal rate of return d) When the NPV and the IRR rules rank mutually exclusive investments differently, we should follow the NPV rule b/c it directly relates to shareholder wealth maximization

b --> IRR is money weighted return isn’t it?

Yes, I agree that it is B. From reading 6, “In investment management applications, the internal rate of return is called the money-weighted rate of return because it accounts for the timing and amount of all dollar flows into and out of the portfolio.”

gotta be B.

definitely b…

B is the answer! What a way to spend a Saturday night… CFA questions!

Wouldn’t B have been duration?

Duration is the measure of interest rate risk.

It is C. Interest rates determine the yield to maturity.

Because the coupons received have to be reinvested. Right?

No, I think it’s B too. It is true that the coupons have to be reinvested but they are assumed to be reinvested at the YTM. Interest rates play no role.

no. its B. Because i remember in the chapter where this is discussed, i used the calculator to find a time weighted rate of return, and i used the cash flow feature then had it calculate IRR.


B is least accurate: The MONEY weighted rate of return is found by calculating the IRR. The IRR is defined as the discount rate that results in a zero NPV. While it’s true that IRR assumes that all cash flows are reinvested at the IRR, this rate is “internally” determined. It’s a strange way of thinking about it, but the NPV calculation assumes that all cash flows are reinvested at the discount rate. The IRR is calculated as an NPV-derived discount rate. So, the IRR assumes that all cash flows are reinvested as that discount rate (which is, by definition, the IRR).