Internal rate of return

The internal rate of return of a bond is essentially the rate of return implied by its total cash flows. If, for example, you are offered a three-year bond for £90 that pays a 5% annual coupon in arrears based on its £100 nominal value, you are paying £90 now to get £5 in a year, another £5 a year later and £105 back when the bond is redeemed.The internal rate of return can be estimated at 8.95% – £5/1.0895 is £4.59, £5/(1.0895 x 1.0895) is £4.21 and £105/(1.0895 x 1.0895 x 1.0895) is £81.20. Combine £4.59 + £4.21 + £81.20 and you get £90, or exactly the original investment. So, if you can get a better rate, say 10%, from a less risky investment such as a cash deposit, all other things being equal, you wouldn’t invest your £90 in the bond.

• See Tim Bennett’s video tutorial: Five ways companies can cook cash flow.

Paul Hodges: house prices could fall 50% in 'Great Unwinding'

Merryn Somerset Webb interviews Paul Hodges about deflation, the global economy's 'Great Unwinding', and how Britain's house prices could halve.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


23 January 1967: Milton Keynes founded

The most famous of Britain's garden cities, Milton Keynes in Buckinghamshire, was founded on this day in 1967, along an American-style grid pattern.