How Much Will I Earn?

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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!

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THE SCENARIO Last time, I talked about a note that a friend wants to sell me. It's one of several, and another is very similar: 10-year, fully amortizing, 12% interest, $30,000 original balance. The question: If I buy that note 22 months after it started and hold it until the very end, how much money in interest will I end up earning? I'll buy the note for the amount that's owed today (22 months after it started).

THE SOLUTION This one has four parts, each of which is straightforward.

Find the monthly payment
Find the current amount owed
Find the total payments I'll collect
Find out how much profit I'll make

First things first, make sure the calculator is using 12 Payments per Year. Part 1: Monthly Payments N: 120 (The note started out lasting 10 years, which is 10 x 12 = 120 months) I/YR: 12 (The borrower is paying 12% interest on the note) PV: -30,000 (The lender originally loaned $30,000 to the borrower) PMT: (This is what I'm trying to find) FV: 0 (The note amortizes fully)

The borrower pays $430.41 each month for this note.

Part 2: Current Owed N: 98 (It's now 22 months into the note, which means that there are 120 - 22 = 98 months remaining) I/YR: 12 (The borrower is paying 12% interest on the note) PV: (This is what I'm trying to find) PMT: 430.41 (From part 1) FV: 0 (The note amortizes fully)

The borrower owes $26,808.59 after paying on the note for 22 months.

Note that last time, I did this type of calculation differently - as an FV calculation rather than a PV calculation. Both are valid approaches for this sort of problem, you just have to make sure you set up your variables correctly. Part 3: Total Collected If I buy the note, the borrower will send me 98 payments of $430.41 (from Part 1). 98 x $430.41 = $42,180.18. (When doing this calculation, make sure to type in the 430.41 instead of recalling it from the PMT slot, as the slot has fractional pennies included, which I'm not receiving.) Part 4: Total Profit If I pay $26,808.59 for the note, and over time it brings in $42,180.18, that means that overall I'll earn $42,180.18 - $26,808.59 = $15,371.59 in interest income (AKA profit).

What do you think? Would you buy this note? Why or why not? Can you think of something better to do with $27K than getting 8+ years of an extra $430 every month? Let us know about it in the comments!

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