Use of the irr method of evaluation

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1. Your uncle gifted you $1,000,000. Now assume you have received those funds and decide to invest all of the $1,000,000 into bonds. From the information in this chapter what type of bonds will you invest in (select at least three types) and give the reasons for your selection.

2. Assume you are trying to determine the yield to maturity of three different bonds. Also assume you purchased each of the three bonds for $10000. The first was a zero-coupon bond; the second was a bond with 2% annual coupons; and the third bond is with 8% annual coupons. Each bond is for 4 years and they are all default free. Discuss what formula you would use in this evaluation and some of the factors to be considered in making this decision.

3. You have decided to use the internal rate of return (IRR) approach to help you select from among the two projects under consideration. Discuss the various pitfalls identified related to use of the IRR method of evaluation.

Reference no: EM13828689

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