Re: IRR Function

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Hello:

Just to make things even more confusing we have something called the APR
which is reported on loan documents. This rate is computed ignoring the
the inter-year compounding. Lenders have "advertised" this rate as being
the "true" rate. Thus if you pay 1.5% per month the lender will report the
APR as 18% (12*.015), but the effective rate is (1.015)^12-1, closer to 19.6%

Pieter Vandenberg

Harlan Grove <hrlngrv@xxxxxxx> wrote:
: Ron Rosenfeld wrote...
: ...
:>However, simple mathematics shows that if you take the 11.96% (actually
:>11.9552927760608%), divide it by 24 to get 0.498137199002532% and apply that
:>interest rate sequentially to the cash flows posted by the OP, you obtain the
:>final result that he posted. To me that means I am earning an effective rate
:>of 11.96% annually, or .498% per period.

: Your terminology is wrong. Your 11.96% annual rate is *not* an
: _effective_ rate, it's nominal annual compounded semimonthly. The
: _effective_ rate is what joeu2... said it was,

: (1 + 0.00498137199002532) ^ 24 - 1 = 12.67% (rounded)

: That said, simple interest is the first order power series
: approximation for compound interest. Often it's close enough, but not
: always. If the question of interest here were whether the annual IRR
: exceeded 12%, simple interest and compound interest would give
: different results. Since IRR is only relevant to compound interest,
: exponentiation is always more appropriate for converting IRRs between
: different time periods.

.

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