See all five posts in this series

Okay, time for part 4.  To recap, the scenario from Part 1, Part 2, and Part 3 is as follows: <!– (Part 5 comes 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

The current owner of the note wants to sell me the note for 15% off its face value (85% of $4,560 = $3,876).

If I buy, what will my yield be if the borrower pays normally and also includes his extra lum-sum payment every February?


SOLUTION

Going back to the previous Uneven Cashflow setup from Part 2, the only thing I change is my Initial Cashflow.  

I change it to -$3,876 and solve for IRR/YR.  

Graphically, that looks like this:

And the cashflow diagram looks like this:

Doing so, I find that my yield is 15.24%, as you can see:  

Buying at a discount really makes a difference, as might be expected!

Money Blog – How discounted is that note really? Part 4
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