Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/238389 
Year of Publication: 
2020
Series/Report no.: 
Serie Documentos de Trabajo No. 764
Publisher: 
Universidad del Centro de Estudios Macroeconómicos de Argentina (UCEMA), Buenos Aires
Abstract: 
The yield to maturity (YTM) or internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. Almost all finance textbooks state the following conditioning assumptions: (i) that the coupon payments can be reinvested at a rate equal to the yield to maturity, (ii) that the bond is held to maturity. We show that there are two common fallacies about these assumptions, and none of them are necessary to interpret this return measure, and they may have probably arisen as a consequence of a semantic misunderstanding. The calculation of the YTM/IRR is the result of an ex ante mathematical operation focusing on current and future cash flows, regardless of the reinvestment rate, which is different from wealth accumulation. At the end of the paper we provide some numerical examples.
Subjects: 
Yield to maturity
Project evaluation
Internal rate of return
Cash flows
JEL: 
G31
G12
G11
Document Type: 
Working Paper

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