YTM vs IRR
IRR (Internal Rate of Return) is a term used in corporate finance to measure and review the relative worth of projects. YTM (Yield to Maturity) is used in bond analysis to decide the relative value of bond investments. Both are computed in the same manner, and there is an assumption that the cash in flow from the various projects is utilized thereafter.
YTM is a concept which is used to ascertain the rate of return an investor would get if he holds long-term, interest-bearing investments, like a mutual bond, beyond its maturity date.
It considers various factors, like time to maturity, purchase price redemption value, coupon yield, and the time between interest payments. It is unconditionally assumed that coupons are invested again at the YTM rate.
YTM can be assumed using a bond value table (also called a bond yield table), or is computed by using a programmable calculator which is specially set-up for bond mathematics calculations.
Internal Rate of Return (IRR), on the other hand, is the rate received on a proposal. As per the internal rate of return method, the rule for decision is: Agree to the project if IRR goes beyond the cost of capital; otherwise, reject the plan.
Based upon the concept of the time value of money, YTM is discount rate at which the current value of all future payments would be equal to the present cost of the bond, which is also referred to as Internal Rate of Return.
It is the rate of interest that equalizes the initial Investment (I) with the Present Value (PV) of future cash inflows. Which deduces that at IRR, I = PV or NPV (net present value) = 0.
A benefit of the IRR method is that it regards the time-worth of money, and is hence more precise and pragmatic than accounting the rate of return. Its main disadvantages are that it does not succeed to identify the variable size of investment in the opposing projects, and their appropriate dollar profitability, and in limited cases, where there are numerous reversals in the cash-flow streams, the plan could give way to more than one internal rate of return.
Summary:
The main difference between IRR and YTM is that the IRR is used to review the relative worth of projects, while YTM is used in bond analysis to decide the relative value of bond investments.
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You say … “Both (IRR & YTM) are computed in the same manner, and there is an assumption that the cash in flow from the various projects is utilized thereafter.”
I hope you are not saying that there is an assumption that dividends are reinvested.
Both IRR and hence YTM do NOT make any such assumption.
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This article should be one sentence: ytm and irr are the same. One more thing: there is no assumption about reinvestment rates in the irr/ytm calculation.
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