Internal Rate of Return (IRR) converts a stream of time-separated payments into a single annual rate. This allows comparing investments with different payment structures: a bond with quarterly coupons, a deposit with capitalization, and a project with uneven cash flows.
For a bond purchased at a certain price and held to maturity, the internal rate of return coincides with the yield to maturity. This is why bond issues should be compared using this metric rather than coupon size: two issues with identical coupons but different purchase prices yield different results.
The metric has a limitation: it assumes intermediate cash flows are reinvested at the same rate. In practice, this condition is rarely met, so the actual result differs from the calculated one—the greater the share of intermediate payments and the more rates changed during the holding period, the larger the difference.