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## How discounted is that note really? Part 3

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 3.  To recap, the scenario from Part 1 and Part 2 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

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 but without his extra lump-sum payment every February?

SOLUTION

I can do this with normal a Time Value of Money calculation.

N is 45 (\$4,560 divided by \$100, rounding down).

PV is -\$3,876

PMT is \$100

FV is \$60

Here's the problem setup:

Solving for I/YR, I find that my yield is 8.63%.

Here's what the cashflow diagram looks like: