See all five posts in this series

This post was inspired by a customer who asked us for some help solving a problem.  We asked him if it was okay with him if we did a Money Blog post about a situation like his, and he said that would be fine.  So here goes!

<!–

(Part 2Part 3Part 4, and Part 5 come next)

–>

THE SCENARIO

I came across a note for sale.  The terms of the note are as follows:

Original balance: \$6,000

Unpaid balance as of June 2: \$4,560

Term: 5 years

Interest Rate: 0

Payments: \$100 per month

If I buy it, make the purchase on June 2, and the first payment I’ll receive will be the July payment.

Every February, the borrower pays off \$1,000 in order to accelerate the note paydown.

QUESTION

If the borrower continues to pay on his normal schedule (including the extra \$1,000 every February), how much longer will he continue to owe the note’s owner anything?

SOLUTION

I’ll start receiving money in July.  That means that I’ll receive \$100 for each of July through January (6 payments for a total of \$600), then \$1100 in Febuary, then \$100 for each of March through January (11 payments for a total of \$1,100), and so on.

So as of next January, the borrower will owe me \$4,560 – \$700 (\$100 per month for 7 months) = \$3,860.

After February, he’ll owe me \$3,860 – \$1,100 = \$2,760.

As of the following January, he’ll owe \$2,760 – \$1,100 (\$100 per month for 11 months) = \$1,660.

After that Febuary, he’ll owe \$1,660 – \$1,100 = \$560.

He’ll be all paid off six months after that.

Adding it up, I get 7 months + 1 month + 11 months + 1 month + 6 months = 26 months.

I’m decent at using a spreadsheet, so here’s how I set up the problem and solved it in Excel:

Money Blog – How discounted is that note really? Part 1
Tagged on: