Irr and equivalence of cash-flow streams, loans, and portfolios of bonds

Gino Favero () and Gherardo Piacitelli ()
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Gino Favero: Università di Parma
Gherardo Piacitelli: ISIS “Scipione de Sandrinelli”

Decisions in Economics and Finance, 2024, vol. 47, issue 2, No 3, 379-399

Abstract: Abstract We show, through a Linear Algebra approach, that a general deterministic cash-flow stream admits a given Internal Rate of Return (irr, either constant or time-varying) if, and only if, it can be replicated by a suitable portfolio of bonds, each with yield to maturity equal to that same irr. Five particular replicating portfolios are examined, including and generalizing other representations known from the the literature, which allow for a unified, irr-based, interpretation of apparently diverse objects. Considering the amortization of a loan as a particular case, further equivalences are found and lead to some original consideration.

Keywords: Capital budgeting; Internal rate of return; Bond markets; Loan amortization; Portfolio management; C60; G10; H80 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10203-024-00450-4

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