Dylan Purchased 20 GIA Inc

question 26

Multiple Choice

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

• A)greater than the coupon rate but less than the original yield to maturity.
• B)less than the original yield to maturity.
• C)greater than the original yield to maturity.
• D)the reinvestment rate has no effect on the internal rate of return.

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Definitions:

Salvage Value

The predicted value at which an asset can be sold after its useful life concludes.

Working Capital

The difference between a company's current assets and current liabilities, reflecting its short-term financial health and operational efficiency.

Net Present Value

A calculation that compares the present value of cash inflows with the present value of cash outflows over a period of time.

Working Capital

The difference between a company's current assets and current liabilities, indicating its ability to meet short-term obligations.