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Chapter 6
3.2 Calculation of yield – The IRR method
The IRR method of calculating yield is closely related to the dividend valuation model
theory introduced above.
DVM theory: The value of a share is the present value of the
expected future dividends discounted at the shareholders’ required
rate of return.
Applying this to bonds (debt finance) gives:
The value of a bond is the present value of the expected future
receipts (e.g. interest and redemption amount) discounted at the
lenders’ required rate of return (yield),
and therefore:
The yield is the IRR of the current market value (bond price), the
annual interest, and the redemption amount.
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