Closing in on the Internal Rate of Return (UMAP)

This module describes three iterative methods for solving equations, motivated by the computation of the internal rate of return (IRR). Two of these methods are general and well known (bisection, Newton's), and the third is peculiar to the computation of the IRR. Each method is illustrated by an application to an actual investment in stocks, bonds, or a mutual fund. Several other investments are described in the exercises.

Table of Contents:

AN INHERITANCE
Stocks
Bonds
Mutual Funds
Comparison

THE TIME VALUE OF MONEY

THE INTERNAL RATE OF RETURN

COMPUTATION OF THE IRR

ITERATIVE SOLUTION METHODS
The Bisection Method
Newton's Method
Convex Method

CONCLUSION

EXERCISES

SOLUTIONS TO THE EXERCISES

REFERENCES

ACKNOWLEDGMENTS

ABOUT THE AUTHOR