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Finally, the Use Business Calendar option requires you to commit a zero if there are no flows on a particular day. This check is not applied to the beginning or ending values in the Partial Period mode. See the following figure.
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Two options, controlled by a drop-down list menu and check box, provide different weighting methods and support annualized IRRs. The drop-down list menu labeled Partial Period Option has three options: None, Calculate Partial Periods, and Null Partial Periods. In addition, a check box outside the option group controls annualization.
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When the basic IRR is calculated, the number of days in the period is determined by the report begin and end dates. This creates consistent day weights for all the calculations on the report.
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| If the beginning position is not found, the Beginning of Day assumption does not adjust the day weight by adding one day and the Middle of Day assumption does not add half a day. Without this additional logic, the first cash flow has a weight greater than 1. |
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Some analysts need the ability to easily identify and exclude securities that are not held for the entire reporting period from the report. This option allows you to report IRRs only for securities that are held for the entire reporting period.
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Along with Calculate Partial Periods, this option is in the drop-down list menu labeled Partial Period Option in the IRR field dialog. See the following figure.
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Analysts need the ability to calculate the annual IRR if the period is greater than the number of days specified for a year (approximately 365).
The Annualize option annualizes the IRR if the number of days in the reporting period is greater than 365. However, if used with the option Calculate Partial Periods, only securities that are held for more than 365 days are annualized.
The basic logic changes the weighting factor in the IRR to:
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It is important to note that lowering the number of digits of convergence causes less accurate Internal Rates of Return to be calculated, so it is important to analyze the effect of any changes. See the following figure.
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In addition to more strictly defined parameters, the enhanced Bisection algorithm continues to process if a guess causes an overflow, underflow, or numerical exception. Bisection needs to be started in the right direction and be able to change direction if necessary.
The IRR calculation uses the midpoint of the upper and lower calculation limit to determine if it should find a positive or negative return. If the value is greater than the EMV, a positive return is assumed and if less than EMV, a negative return is assumed.
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