I had a discussion the other week with an investor colleague who had just bought a note at a discount. That discussion got me thinking, and those thoughts became this week's Money Blog entry. I've changed the numbers to protect the innocent. =)
This part seems simple, but it's just the setup for a more intriguing set of questions to come. Stay tuned!
Say I've bought a note for $20,000. The amount owed is $74,947.52, the collateral is worth $200,000, and there are no other notes or encumbrances on the collateral. I feel good about having bought the note, because it satisfies my happy/happy/happy criteria.
The terms of the note are as follows: 30-year amortization on a $78,500 original balance, at 7% interest.
a) What's the monthly payment on this note?
b) How many more payments are left in the note?
c) If the note continues to pay as-written, what's the return on my amount invested?
a) N is 360, I/YR is 7, PV is $78,500, FV is 0. Solving for PMT, I find that the monthly payment is $522.26.
b) I/YR is still 7, PV is $74,947.52, PMT is $522.26, and FV is 0. Solving for N, I find that 312 payments are left.
c) N is still 312, PV is still $74,947.52, PMT is still $522,26, and FV is still 0. Solving for I/YR, i find that the return on my investment is 31.33%.