See all five posts in this series

Okay, time for part 2.  To recap, the scenario from Part 1 is as follows:  <!–(Part 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 I buy the note for its face value ($4,560), what will my yield (or Return On Investment, or the Internal Rate of Return of the deal) be?


SOLUTION

Note: This requires Uneven Cashflows.  Don’t freak out, it’s going to be okay.

Uneven Cashflow Setup:

Initial Cashflow = -$4,560

Payments of $100 times 6

Payment of $1,100 times 1

Payment of $100 times 11

Payment of $1,100 times 1

Payment of $100 times 6

Payment of $60 times 1.  

Graphically, the setup looks like this:

The Cashflow daigram looks like this:

Solving for IRR/YR, I find that if I buy the note at no discount, my yield is 0.00%.  

 

Not as impressive as I’d like, but it makes sense since the note is written at 0% interest.

Money Blog – How discounted is that note really? Part 2
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