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.)

1 Answer 1


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.

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