Compare Bond-Like Investments by Internal Rate of Return

Summary

The document asks how to compare two investments with the same initial cost but different annual cash payments and terminal repayment amounts. One pays larger yearly interest but returns less principal at maturity; the other pays smaller yearly interest and returns the full stated face value.

The answer recommends calculating each investment’s internal rate of return from its cash flows as a way to compare returns. It flags that IRR has limitations, but does not identify them or explain how to handle them. No calculation is shown, so the document does not establish which investment is preferable; actual choice would also depend on assumptions about timing, reinvestment, and risk that are not discussed.

Key ideas

• Equal purchase prices do not make investments with different cash flows equivalent.
• Internal rate of return can summarize and compare each investment’s cash-flow return.
• The answer cautions that IRR has limitations but does not elaborate on them.
• No IRR values are calculated, so the document does not select a preferred investment.

Tags

# Choice between 2 investments that cost the same but offer different interest and face value


# Choice between 2 investments that cost the same but offer different interest and face value












Assume, you have a choice between two investments that both cost \$1000 each, however investment A pays \$20 a year and \$950 at the end of year 5 but investment B pays \$10 a year and \$1000 at the end of the 5 years. Which investment should I choose based on it offering a better return?

## Answer by zglin (score 2)

https://quant.stackexchange.com/a/25910

Why don't you calculate the IRR of each investment? (aside from all the issues with IRR).

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