The answer is confounding (or rather compounding)!
Quote:
Originally Posted by
BJ1
Alister, I don't use XIRR but I have been playing this morning. If I assume a loan of $1,000 @15.16% lent on 14/1/17 and repaid with interest on 14/2/17 then my cash received is $1010.9443 after paying 15% fee to Harmoney which is a rate of 12.886% after fees, as expected. However, using XIRR I get 13.67%. Do you get the same? Putting in the full cash flows over 7 months for the actual loan which was repaid after that time, I get 13.62%. It seems that XIRR doesn't accurately calculate returns, but overstates them. Am I doing something wrong?
Hi BJ1
Your post got me stumped for a while too. Had a bit of time while taking a break from my work and did some testing of XIRR.
In the end I realised that the XIRR is correct. The difference is compounding of interest.
Say net interest is 12%, so invest $1000 on 1 Jan and you will get back $1010 on 1 Feb. XIRR is 12.4296%
but invest $1000 on 1 Jan and you get back $1130 (13 months) on 1 Feb the next year. XIRR is 11.924%
In the first case, IF you reinvest the $10 interest on 1 Feb at 12% for the rest of the year (11 months), you should get $124.29 interest in total after 12 months - so XIRR is correct
conversely, the second senario is that had you invested the $120 interest for the first 12 months for that extra month, you should get more than $130 in total, so the $130 is less than 12% and the XIRR of 11.924 is correct.