My Prosper Internal Rate of Return Update (End of Jan 07) — 1.67% | P2P Lending, Peer to Peer Lending, People to People Lending

#1TB on 02.01.07 at 4:25 pm

I have spent a lot of time over the years calculating IRRs using Excel. Hopefully my makes you feel even better about your Prosper investments. To calculate your annualized IRR based on your cash flows, you should use the XIRR function, which takes into account the timing of the cash flows. The plain IRR function doesn’t. By my calculations, which I am happy to send to you, your annualized IRR as of 1/31/07 is 17.8%, assuming that you could withdraw your entire account balance on 1/31/07, interest was received at the end of each month and money was added in the middle of the month. If you added money at the beginning of each month, your annualized return has been 15.3%.

#2Kevinon 02.01.07 at 4:31 pm

I am clearly not an expert, but I like to play one on TV…

I would love a little more explanation… my average interest rate is only 16.3%, how could I have an IRR of 17.8%? I thought the regular IRR function required regular intervals (months for example) which is why I simplified my cash flows into months. What am I missing?

#3TB on 02.01.07 at 4:49 pm

For the plain IRR function to return the annualized return, the interval between the cash flows has to be exactly one year. In your case the interval is one month. The exact timing of when you add money (invest) and when you receive the interest payments will make a difference to the annualized IRR as could be seen in the difference between the annualized IRRs if you added new money at the beginning of or half way through the month (in my calculations). Also, if your current average interest is 16.3% but some of the loans that you made earlier on had a higher ones (and all payments have been received) your annualized return to date would be higher than the current average interest rate. The annualized IRR going forward could not be higher than 16.3% unless you invest in new loans that earn you a higher return. Personally, I would be ecstatic if I earned a 16% going forward. I can send you the Excel sheet if you send me an e-mail I can respond to.

#4TB on 02.01.07 at 4:51 pm

Sorry, you beat me to it. I will send you my calculations.

#5Kevinon 02.01.07 at 4:56 pm

Yes the interest rates are pretty astounding. I just keep telling myself to expect defaults and then I hope that they wont happen. :) I am expecting for a predictable stable IRR of over 10% and hoping for over 12%.

If IRR is calculating annually and I am assuming monthly then I should be able to multiply by 12 and get a reasonable number (1.67*12= 20.04%). Is that right?

#6Kevinon 02.01.07 at 9:24 pm

I have updated the Jan IRR…

#7Argonaut on 02.02.07 at 1:29 pm

Are you defining “default” the same way Prosper defines “Default”, or are you throwing lates in as well?

– Argonaut

#8Kevinon 02.02.07 at 9:14 pm

Any late will be treated as a default until it is sold as default or becomes current.

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