Chapter 4 Yield Rates

Net present value (NPV) The present value of the cash inflows minus the present value of the cash outflows.

Yield rates or internal rates of return (IRR) The interest rate which makes the NPV zero.

Uniqueness of the yield rate Conditions for the uniqueness. Rule 1: The swift from cash outflows to cash inflows occurs only once; Rule 2: The sign of accumulated value under the IRR changes only once.

NPV v.s. IRR Sometimes NPV is preferred. See https://www.investopedia.com/ask/answers/05/irrvsnpvcapitalbudgeting.asp

Reinvestment rates

Dollar-weighted interest rate Appropriate for evaluating the performance of an investor.

Time-weighted interest rate Appropriate for evaluating the underlying performance of a fund

Portfolio method All get the same yield rate no matter when they began to invest.

Investment year method Interest is credited in a way that recognizes the joining time to a fund.