Internal rate of return(IRR) refers to the discount rate of which makes the net present value of all cash flows (both +ve and -ve) equal to zero for a specific project or investment.

Internal rate of return is a metric used in financial analysis to estimate the profitability of potential investments.

IRR may arise in various forms and can quickly impact a credit union's earnings and net worth. IRR is inherent in a variety of transactions and the degree of its impact is driven by changes in market rates.

Types of IRR include re-pricing risk, basis risk, yield curve risk, option risk, and price risk.

i) Basis risk arises from a change in the relationship of rates in different financial markets.

It occurs where market rates, or the indices used to price assets and liabilities, change at different times or by different amounts.

ii) Yield curve risk bases on exposure to various changes in the shape or slope of the yield curve.

It occurs when assets and funding sources are linked to similar indices with different maturities.

iii) Option risk refers to the risk that a financial instrument's cash flows (timing or amount) will change at the exercise of the option holder (such as a depositor, borrower, or other transaction counterpart), who may be motivated to exercise an option by changes in market interest rates. 

iv) Re- pricing risk arises from the possibility that a credit union's assets and liabilities will re price at different times or amounts and potentially negatively affect the credit union's earnings, net worth, and financial position.

Re- pricing differences create a mismatch between sources and uses of funds.