B
Reinvestment risk When interest rates are declining, investors have to reinvest their interest income and any return of principal, whether scheduled or unscheduled, at lower prevailing rates.Interest rate risk When interest rates rise, bond prices fall; conversely, when rates decline, bond prices rise. The longer the time to a bond's maturity, the greater its interest rate risk.
The IRR reinvestment rate assumption is the mistaken assumption that the IRR of a project implicitly assumes that all positive cash flows from the project that occur in periods before the end of the project will be reinvested at the rate of IRR per period until the end of the project.
Some danger of high yield money are: Credit risk, currency risk, duration risk, political risk and taxation adjustment risk. Reinvestment risk and market value risk.
The definition of reinvestment assumption is an assumption made concerning the rate of return that can be earned on the cash flows generated by capital budgeting projects. The cash flow can be interest, earnings, dividends, or rent.
B
Reinvestment risk When interest rates are declining, investors have to reinvest their interest income and any return of principal, whether scheduled or unscheduled, at lower prevailing rates.Interest rate risk When interest rates rise, bond prices fall; conversely, when rates decline, bond prices rise. The longer the time to a bond's maturity, the greater its interest rate risk.
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Critics argue that equivalent yield, which is calculated using the reinvestment rate assumption, may not reflect the actual reinvestment opportunities available. Additionally, it assumes that coupon payments can be reinvested at the equivalent yield, which may not always be achievable in practice. Lastly, equivalent yield does not account for the risk associated with reinvestment, potentially leading to inaccurate valuation results.
The IRR reinvestment rate assumption is the mistaken assumption that the IRR of a project implicitly assumes that all positive cash flows from the project that occur in periods before the end of the project will be reinvested at the rate of IRR per period until the end of the project.
Some danger of high yield money are: Credit risk, currency risk, duration risk, political risk and taxation adjustment risk. Reinvestment risk and market value risk.
Apparently the NPV and IRR are methods to obtain capital budgets. The reinvestment rate assumption affects both methods because it is what determines now much incoming cash flow is reinvested into project.
The definition of reinvestment assumption is an assumption made concerning the rate of return that can be earned on the cash flows generated by capital budgeting projects. The cash flow can be interest, earnings, dividends, or rent.
Risk-Free Rate= Norminal Rate Of Return - Risk Premiums
The risk free rate has to meet two criteria:(1) there can be no risk of default associated with its cash flows and(2) there can be no reinvestment riskUsing these conditions, the appropriate risk free rate to use to obtain expected returns shouldbe a no default (usually government) zero coupon bond that is matched up to when the cash flow or flows that are being discounted occur.But it is usually appropriate to equate the payback duration of the risk free asset to the duration of the cash flows of a project/investment being compared, usually U.S. government bond (10 year) rates as risk free rates.Pre-calculated risk-free rates based on the Svensson method for USD and EUR can be found at www.quaestorial.comThere is also audit-proof documentation available for each rate.
Interest rate risk is measured by time to maturity and coupon rate
The annual rate is the interest rate charged on a loan or investment, while the annual yield is the actual return earned on an investment, taking into account factors like compounding and reinvestment of earnings.