Question

How are the Realized Compound Yield (RCY) and the MIRR related? In each case explain the factor that causes the use of each, i.e. why do we use each?

Answer 1

From a bonds-theory perspective, Cebula and Yang (2008, JEFE) discussed
the link between YTM (yield to maturity) and RCY (realized compounding yield) or realized rate
of return, showing vigorously that RCY is in fact the YTM of two investments: holding a bond
until maturity, and (re)investing the coupon payments periodically in something like a discount
bond when they are received. Hence, RCY is a (weighted) average of the (initial) YTM and the
rates of reinvestment, whereas the YTM is the rate of return from holding the bond per se. By
definition, YTM has nothing to do with whether and how coupon payments are reinvested when
they are received. And RCY relies on both cash flows from holding the bond and the rates of
reinvestment.
In a capital budgeting content, IRR is analytically defined in the same way as YTM and
MIRR is equivalent to RCY.