Posted by Ben (IN) on August 15, 2003 at 12:00:50:
David,
Thank you. That is very enlightening and answers my question completely.
Ben
Amortizing a lump sum paydown - Posted by Ben (IN)
Posted by Ben (IN) on August 14, 2003 at 22:02:26:
I came across an interesting question today that I didn’t have an answer for. If anyone has the answer to this it would be much appreciated.
A note is originated and paid on for two years, then a lump sum payment is made that significantly reduces the balance, and then payments are resumed in the same amount pre-paydown.
Question is, how do you approach this (I have an HP12C) to get an amortization table for the remaining term of the note? And how do you discount the note to determine what to pay?
To use some numbers; the original balance of the note is $135,000, rate is 7%, pmt is $898.16, 360 pmts. After 24 pmts a principal payment of $53,733 is made. My calculations put the balance at that point at $78,425.18.
How is the note amortized from that point on? Do I put the new balance in PV and solve for N, or is it calculated another way?
Ben (IN)
Re: Amortizing a lump sum paydown - Posted by David Butler
Posted by David Butler on August 15, 2003 at 10:50:05:
Hello Ben,
Actually, accelerated paydowns are a quite common occurrence, and very beneficial for note investors when it occurs!
Q. A note is originated and paid on for two years, then a lump sum payment is made that significantly reduces the balance, and then payments are resumed in the same amount pre-paydown. Question is, how do you approach this (I have an HP12C) to get an amortization table for the remaining term of the note?
A. same process will occur whether the principal reduction is minimal or significant. In the instance where no changes are made to the note agreement itself, you simply calculate the remaining term based on the new principal balance!
Q. To use some numbers; the original balance of the note is $135,000, rate is 7%, pmt is $898.16, 360 pmts. After 24 pmts a principal payment of $53,733 is made. My calculations put the balance at that point at $78,425.18.
(Okay… let’s check that…)
PRESENT VALUE = PV = 135,000
INTEREST/YIELD = I/Y = 7
PAYMENT = PMT = 898.16
then solve for Term according to your calculator’s operating instructions
TERM = N = 360
After 24 payments, remaining balance should be $132,158.13. At that time, Payor pays an extra $53,733 toward the principal balance, leaving $78,425.13… so check!)
How is the note amortized from that point on? Do I put the new balance in PV and solve for N, or is it calculated another way?
A. Yep… very simple process.
PRESENT VALUE = PV = 78,425.13
INTEREST/YIELD = I/Y = 7
PAYMENT = PMT = 898.16
then solve for Term according to your calculator’s operating instructions
TERM = N = 123 (actually 122.42 pmts remaining)
Q. And how do you discount the note to determine what to pay?
A. Not sure I am following what you might be asking here? Process of discounting a note is based on underwriting to your standards (“Investment Value”), then applying ITV ratio and yield requirement desired, to the cash flow being purchased. The lower of the two pricing alternatives (ITV or yield) establishes what you pay.
Here for example, there are 122.42 monthly payments of $898.16 available for sale. Assuming a whole note purchase, that’s what will be discounted. So, you take the last math example from above, replace the 7% nominal interest rate with your own desired yield rate, reposition the variable being solved for (PV in this case), and calculate the amount you can invest for 122.42 payments of $898.16, to earn the desired rate on your money.
For example… let’s say you demand a 14% yield on your investment for this note…
TERM = N = 122.42
INTEREST/YIELD = I/Y = 14%
PAYMENT = PMT = 898.16
then solve for Present Value according to your calculator’s operating instructions
PRESENT VALUE = PV = 58,376.02
To earn 14% on your money, you would pay $58,376.02 for this particular cash flow.
Hope that helps, and best wishes for your success!
David P. Butler