Solve for Risk-Adjusted Internal Rate of Return (IRR)

Finds the monthly discount rate at which the APV of the loan (see calculate_apv()) matches abs0_bal. The rate is found with stats::uniroot() over monthly rates between -0.5 and 1; an error is thrown if no rate in this range matches abs0_bal.

Usage

solve_irr(
  x,
  abs0_bal,
  cur_age,
  orig_term,
  orig_loan_amt,
  mon_pmt,
  recov_curve,
  orig_apy = 0.15,
  type = "constant"
)

Arguments

x

An object of class alife_multi. Typically the output of the estimate_hazard function with two event types.

abs0_bal

Current loan balance (to match the APV against).

cur_age

Current age of the loan in months.

orig_term

Original loan term in months.

orig_loan_amt

Original loan amount.

mon_pmt

Monthly payment amount.

recov_curve

Recovery curve data.frame with columns month and recovery (the recovery rate as a proportion of orig_loan_amt). It must contain every month from cur_age to orig_term - 1.

orig_apy

Internal loan APY for amortization. Defaults to 0.15.

type

A character string specifying the extrapolation type passed to extend_hazard(): either "constant" (default), "geometric" or "linear".

Value

A list with the risk-adjusted monthly rate (monthly_rate), the annualized rate (annualized_rate), and the squared difference between abs0_bal and the APV at the solution (objective).

Details

x must contain exactly two event types, and the default event must be labeled either "Default" or "1"; the other event type is treated as prepayment. If the observed lifetime support does not reach orig_term, the hazards are extrapolated up to orig_term with extend_hazard() (with a warning). After that, hazard estimates must be available for every lifetime from cur_age + 1 to orig_term; otherwise, an error is thrown.