Final answer:
The statement is true; the yield to maturity (YTM) on a bond is its internal rate of return (IRR). It accounts for all future cash flows, including coupon payments and the return of principal, matched against the bond's current market price.
Step-by-step explanation:
The statement that the yield to maturity on a bond is really its internal rate of return (IRR) is true. The yield to maturity (YTM) represents the total return an investor expects to receive if they hold the bond until it matures, assuming all payments are made as scheduled. This includes the interest payments received (coupon payments) and any gain or loss if the bond was purchased at a discount or premium to its par value.
YTM is considered a long-term bond yield, but it is expressed as an annual rate. Essentially, it matches the present value of all future cash flows from the bond (payments and repayment of principal) with the current market price of the bond. Therefore, YTM can be seen as a bond's internal rate of return, which calculates the rate of return that sets the net present value of all future cash flows equal to the current price of the bond.
Bonds that offer a high rate of return but also a relatively high chance of defaulting on the payments are called high-yield or junk bonds. Investors need to be aware that even with these risks, the YTM serves as a useful tool for comparing the return of bonds with different maturities and coupon rates.