Implied Repo Rate IRR is the rate of return of borrowing money to buy an asset in the spot market and delivering it in the futures market where the notional is used to repay the loan. (This definition of IRR should not be confused with internal rate of return

Internal rate of return

The internal rate of return is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return or the rate of return . In the context of savings and loans the IRR is also called the effective interest rate...

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Simplified closed form

Determine the Cheapest To Deliver asset

To determine the cheapest bond in a basket of deliverable bonds against a futures contract, implied repo rate is computed for each bond; the bond with the highest repo rate is the cheapest. It is the cheapest because it has the lowest initial value to yield a higher return provided it is delivered with the stated futures price.

The net basis between a futures price and its underlying bonds may provide an indication of which bond is the cheapest. However, since the method, unlike the IRR method, neglects the actual running cost of bonds, it is less accurate as a measury for CTD ranking.