Okay, time for part 4. To recap, the scenario from Part 1, Part 2, and Part 3 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 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!
