Money Banking and Finance: IRR, Financial Intermediaries, and Monetary Policy

Money Banking and
Finance

Table of Contents
Part B .............................................................................................................................................3
Define the Internal Rate of Return (IRR) is the Yield to Maturity (YTM). ...................................3
Part C .............................................................................................................................................4
‘Financial intermediaries are vital to a well-functioning financial system’. Critically analyse
this statement. ............................................................................................................................4
Part D .............................................................................................................................................7
Discuss the factors that determine the time-lag between the applications of instrument or tool
of monetary policy and the achievement of the ultimate goal....................................................7
REFERENCES................................................................................................................................9

Part B
Define the Internal Rate of Return (IRR) is the Yield to Maturity (YTM).
Explain how the YTM is used to calculate the yield curve and why investors track moves in the
yield curve. (Bachmann, 2019)
The internal rate of return is always calculated considering the organisation perspective as in
IRR an entity wants to evaluate whether the proposed project is financially viable for the
business concern or not. The more the IRR the higher chances of proposal being selected by
enterprise. Where as in yield to maturity, the expected return has been calculated by an investor
who invest their funds in business concern so that they can get their desired returns. YTM is a
measure of bond rate of return that considers both income by way of interest and capital gain or
loss.(El Ibrahimi and et.al., 2021)
We can say that YTM is bond internal rate of return as it is calculated when bonds current
market price and cash inflows including interest and principal till maturity of the bond is known
to the organisation. YTM equal the current price of bond with the future payment which is
earned by stakeholders in form of present value of cash inflow which includes interest also and
maturity value at the time of redemption of these bonds if they hold till maturity by the users.
It can be said that the correct method for calculating yield to maturity is internal rate of return
however as a practical consideration there is another approach to calculate it by using the
following formula as under: -
YTM = Interest + (Redeemable value – Current Market Price) / N
(Current Market Price + Redeemable Value) / 2
It is important to understand that the above formula is not provide the exact YTM, it just
calculates the approximate YTM. The exact amount of YTM is calculated by using trial and error
method which is used to calculate internal rate of return. The correct YTM is when occurs when
security expected return matches with the current market price of bonds.
Yield curve is nothing but the graphical presentation of interest payments earned by the investor
who invested in entity’s bonds till maturity of such bonds. It also highlights the maturity value
earned by stakeholders on maturity. This curve ranges ups and downs in graph as and when there
is fluctuation in the cash inflows received by investors. On the X axis of such curve interest