# Understanding how to compare internal rate of return to fixed income investment

I know that the IRR is the interest rate that makes the net present value zero. And I understand that a higher IRR means a better investment. So if I calculate an IRR of 14% for an investment and I want to compare it to keeping my money in a savings account, does that mean I would need to get an interest rate of 14% or more on the savings account before it would be a better use of my money than the investment? (ignoring all the other issues, like which is safer, etc.)

Assume all else is equal except the rate of return. Do not consider taxes.

As an example, take a 1-year US zero-coupon bond with face value of \$1000 and price of \$970.874. Yield to maturity = IRR = 3%.

Say you have a savings account with an APR of 1%. Interest is compounded monthly.

Put \$970.874 into the savings account. After one year the amount in the savings account is \$970.874(1 + 0.01/12)^12 = \$980.627.

You can look at this another way. Were the APR 2.96%, with monthly compounding, after 1 year the value of the savings account would be \$1000, equal that of the bond. Here the periodicity of cash flows matters (12 per year for the savings account vs 1 for the bond). In essence, the IRRs are close to equal.

Both are pretty safe investments. While the example yields are high for the actual instruments, to get a yield of 14% would require quite a difference in risk from that of a savings account. A corporate bond with an IRR of 14% is much more risky. While it would provide a higher return, if all cash flows are paid on time, the company could default, resulting in loss of principle.

Not sure if the example helps, but I think risk would be the main factor here, in a real life situation. Basically, how willing are you to lose your money for a greater return, if the investment does not go your way.