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How discounted is that note really? Part 2

Note: You can use any financial calculator to do this problem, but if you want the BEST, you can get our 10bii Financial Calculator for iOS, Android, Mac, and Windows!

Okay, time for part 2.  To recap, the scenario from Part 1 is as follows:

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.