If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is

In mathematical terms, you are looking for a value of R to solve the following equation: 3

150=55 (1+R) + 133 (1+R) = 0

1. Use the IRR formula in Excel Set up the valves from (ii) like this in a column array: - 150

55

0

133

with the - 150 in the top cell of the array.

This will make sure that the present value of all flows is zero. In other words,-150 will be equal to the present value of the other three. There is no payment in year 2, So that's a zero.

You get the answer 0.0998; that's 9.98%.

This is called the Internal Rate of Return, by the way. That's why the function is called IRR.

If you put R = 0.0998 in equation (i) or (ii) at the top, you'll find it balances.