Can someone explain to me why the below holds true (from the vault guide)? Thanks.
Q: If you put $100 in the bank and got back $2 every year for the next 19 years and then in the 20th year, received $102, what is your IRR?
A: 2 percent. The duration of the investment does not matter.
You are receiving $2/yr for 20 years with the return of your principal in the 20th year. This is the same as a 20 yr 2% bond held to duration (assuming only annual distributions).
Do the IRR equation
0 = -100 + (2 / (1 + IRR)^1) + ..... + (2 / (1 + IRR)^19) + (102 / 1 + IRR)^20)
-100 => Initial Investment
2 => Cash flow years 1-19
102 => Cash flow year 20
Okay, how would I do it without a calculator?
Interest / Principal
In this case: $2 / $100 = 0.02 = 2.0%
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