besoqor
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Hello everyone!
I'm a starter in financial math and I have 2 questions about Internal Rate of Return (IRR):
For example, the person X wants to take a $4500 credit from bank at 15.9% for 3 year. The payments to the bank are required to make yearly, not monthly. According to the Financial Calculators and the formula of a PMT (payment) in Excel, if the person X makes payments once a year, the amount of each payment is $2000. So, the person X will make a total $6000 payment, the sum of 3 payments of $2000.
Now, I want to calculate IRR. Financial Calculators say me, the IRR in this case is 15.9%.
Question 1: Is available or not IRR of bank credit not to be the same as Interest Rate of credit?
Question 2: There is the rule of using IRR: If IRR is greater than Interest rate of State Bonds, the investing project is acceptable. and if the IRR is always equal to Interest Rate of credit of bank, which automatically is greater of Interest rate of State Bonds, does this mean that IRR of bank credit is always admissible?
thank you for answers. 
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Thu Jul 29, 2010 10:42 pm |
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coaster
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I'm sorry, but neither of your questions is clear enough to answer. Could you rephrase them, please?
The interest rate of state bonds is taken to be the "risk-free" rate of return; any return over that compensates for the instrinsic and market risks of the invested capital. You have to determine what that risk is worth, called the "premium", in order to determine whether that capital is better deployed in the risk-free vehicle or the at-risk vehicle. Therefore it's a given that when the at-risk return is expected to be less than the risk-free return, you deploy the capital in the risk-free vehicle.
My question to you: are the state bonds really "risk-free"????
~Tim~
Eye Candy : Why Whimsy
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Fri Jul 30, 2010 3:17 pm |
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besoqor
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quote:
Originally posted by coaster
I'm sorry, but neither of your questions is clear enough to answer. Could you rephrase them, please?
The interest rate of state bonds is taken to be the "risk-free" rate of return; any return over that compensates for the instrinsic and market risks of the invested capital. You have to determine what that risk is worth, called the "premium", in order to determine whether that capital is better deployed in the risk-free vehicle or the at-risk vehicle. Therefore it's a given that when the at-risk return is expected to be less than the risk-free return, you deploy the capital in the risk-free vehicle.
My question to you: are the state bonds really "risk-free"????
I Don't know if it's possible not to be state bonds non risky, perhaps it's possible, but my question isn't this.
So, the person wants to take a loan (credit) from bank, amount of $4500 at 15.9% interest. According to Future Value of an Annuity formula,he will make 3 equal payments: At the end of first year, he pays to bank $2000. At the end of second year, he pays to bank also $2000. And at the end of third year, he pays to bank $2000. So, sum of his 3 payment is $6000.
Now, as a credit officer (conjunction as if I'm Credit officer) I wonder if IRR of this project is or not greater of 11%. So, I use this clculator which says me that: If outflow (from bank) is $4,500, first Inflow (in banks) is $2000, second Inflow is $2000 and third Inflow is $2000, Internal Rate of Return (IRR) is equal to 15,9%
So, my question is: why IRR=R (Interest Rate of loan) ?
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Fri Jul 30, 2010 9:05 pm |
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