Since all income from these securities is derived from the repayment of the underlying home mortgage loans, income depends on the rate those loans are repaid. A pass-through expected to provide income over the next eight years may turn out to have a repayment period that is significantly shorter or longer than eight years. If the repayment period differs significantly from the expected, the actual yield on the investment may also differ. Once an investor's pass-through security has been paid off, he or she knows the amount paid for it, the cash flows received, and the yield expected, but does not know the yield actually received. This yield can easily be calculated with the modified spreadsheet used in Table 2.
E shows the projected value of the amount invested and principal payments received.
The rate of return that equates the projected value of the purchase price with the projected value of interest and principal payments after all payments have been received produces a projected value of zero and is the internal rate of return. The IRR here has the same meaning as shown in Table 1 with mutual fund investments. An IRR greater than the best available return on an alternative investment means this security was a profitable investment. One less than the best available alternative return implies a superior investment was available. Financial Planning for College or Retirement Investors who save for their children's education or for retirement struggle with the relationship between their yearly savings, the return on their investments, and the amount of funds that will be available when those events eventually transpire.