Question

Which of the following is a not correct?

a. The yield to maturity (YTM) and the internal rate of return (IRR) are the same

b. The YTM and the IRR both suffer from the reinvestment rate assumption.

c. The YTM suffers from the reinvestment problem when market interest rates change.

d. The IRR suffers from the reinvestment problem when the general level of interest rates change.

e. The realized compound yield corrects YTM; the modified internal rate of return corrects the IRR.

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Which of the following statements is correct?

a. The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the IRR.

b. The NPV method assumes that cash flows will be reinvested at the risk‑free rate while the IRR method assumes reinvestment at the IRR.

c. The NPV method assumes that cash flows will be reinvested at the required rate of return while the IRR method assumes reinvestment at the risk‑free rate.

d. The NPV method does not consider the inflation premium.

e. The IRR method does not consider all relevant cash flows, and particularly cash flows beyond the payback period.

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If the calculated NPV is negative, then which of the following must be true? The discount rate used is:

a. Equal to the internal rate of return.

b. Greater than the internal rate of return.

c. Less than the internal rate of return.

d. Greater than the reciprocal of the payback period.

e. Less than the reciprocal of the payback period.

Answer 1

Answer:

1.Option A

Reason: IRR is the interest rate at which NPV is equal to zero and it measures project profitability and at this rate amount is reinvested whereas YTM is calculated on the investment which is already made and it is calculated based on current price of bond or fixed securities.

2. Option A

Reason:NPV method assume that cash flow will be reinvested at required rate of return or cost of capital and IRR method assume that reinvestment at IRR. Other options are wrong because NPV method consider inflation in nominal rate calculation and payback period does not consider past payments.

3. OPTION B

Reason:only time NPV can negative when IRR is greater than discount rate. That means at required rate of return reinvestment will not be beneficial than reinvestment at IRR.