IRR Doubt
For a lending company, if they are asking for a 10% yield on a 1 year loan they are providing. Is it possible to have a 5-6% IRR. And is this 5% IRR acceptable to the company disbursing the loan?
For a lending company, if they are asking for a 10% yield on a 1 year loan they are providing. Is it possible to have a 5-6% IRR. And is this 5% IRR acceptable to the company disbursing the loan?
Career Resources
Yes, it is possible for the IRR to be lower than the interest rate. So long as the contractual interest is paid (that would be the 10% here), the lower IRR would be due to capital depreciation in the loan itself; in other words, the borrower paid back less than the face amount of the loan. To provide an example, if the lender lent $100 at a 10% interest rate, then the borrower must pay back the $100 loan + the $10 of interest. Say the borrower successfully paid back the $10 of interest. For the IRR to be around the 5-6% you mentioned, then it will be because the borrower paid back less than $100. Play around in excel with the payments and timing to find out how much less the borrower would have to pay back to match the 5% IRR. As for whether a lender would find this acceptable, probably not unless for whatever reason they already expected the capital loss.
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