Dylan purchased 20 GIA Inc.bonds in 2008 when the yield to maturity was 12.5%.Because of falling interest rates she had to reinvest the coupon payments at 8%, 6%, 4% and finally, 3%.The internal rate of return on her investment will be

Question

Quizplus · Accepted Answer

The reinvestment rate has a significant impact on the internal rate of return. In this case, because Dylan had to reinvest her coupon payments at lower rates than the original yield to maturity of 12.5%, her overall return will be lower than the original yield to maturity. Therefore, her internal rate of return will be less than the original yield to maturity, which is option B.

Dylan Purchased 20 GIA Inc