Pref Equity IRR question
I created an annual model for a pref equity investment utilizing a 5% current pay and 10% PIK pay. When stripping out all fees, this annual model gets me an even 15.0% IRR.
However, when using the exact same cash flows and formulas to build out a monthly model, I get a 15.5% IRR. I believe my issue lies in how my interest is run, but can't seem to get it spit out an even 15.0% IRR on the monthly. I'm calculating interest monthly by (1+Annual Rate)^(1/12)-1.
Before anyone asks, a straight Annual Rate/12 got me an even higher IRR (close to 16%), and same with the ((Current Month - Prior Month)/365)*Annual Rate.
Does anyone know why the monthly model and annual model aren't calculating the exact same IRR? Greatly appreciate it!
IRR is a time weighted metric. In the monthly scenario, you receive the cash flows sooner vs the annual scenario so it's greater.
This why XIRR always solves to a slightly higher IRR than IRR does.
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