Is the yield; 16%, 13% or 8.5% ? - Posted by Doug

Posted by Sean on January 09, 2001 at 09:20:33:

Fuzzy math! The point you need to realize is that in scenario 3 you are mis-stating the amount of the investment. You are saying $885/year divided by the $10,000 invested, but at the end of the first year do you still have $10,000 invested?

No. With the very first payment the borrower has reduced your investment by paying some of the principal. To properly calculate your yield for the first year without a financial calculator you’d need to work out the average investment by calculating the principal at the end of each of the 12 months and dividing by 12 to get the average. Under those circumstances I think you’ll find that the yield is still 16%

Consider this scenario instead: You have those 2 notes all for sale at $9,000 (Example 1 and 3). Which is the best note to buy under the circumstances?

Note 1 yield: PMT=133.33 PV=9000 (what you’re paying) nper=36 FV=10000. Solve for i% -> 20.5%

Note 2 yield: PMT=351.57 PV=9000 nper=36 FV=0. Solve for i% -> 23.7%

Accordingly we can conclude that note 3 is the better note and that note 1 would need to come down in price before we’d be interested.

Is the yield; 16%, 13% or 8.5% ? - Posted by Doug

Posted by Doug on January 09, 2001 at 24:29:27:

I am using a Texas Instruments BA11+ for the following calculations.

You have 10,000 you want to invest in paper/notes.

[Scenario One.]
Invest 10,000 at 16% in an interest only ballon for 36 months/three years.
10,000 x .16 = $1600 year x 3 years = $4800.
1600/10,000 = 16 % interest
-10,0000 PV, 10,0000 FV, 16 I, 36N, CPT PMT = 133.33

[Scenario Two]
On compounding interest worksheet of my calculator
Old = 10,000
New = 14,800 (that?s 10,000 x .16 = $1600 year x 3 years = $4800 + 10,000)
PD = 3
%CH = 13.96 %

[Scenario Three]
I have good idea why this is different?. amortization
Invest 10,000, 36 months, 16% interest, amortized
10,000 PV, 36N, 16I, CPT PMT = 351.57
351.57 month x 36 months = 12,656.53 total you receive back
12,656.53 - 10,000 = $2,656.53 profit total
2,656.53 total profit / divided by three years = $885 per year
$885 / divided by $10,000 invested = 8.85 %

Seems to me like interest-only balloons are a lot better. Yet I have heard they are dangerous and to stay away from them.

I would like to hear from the math surgeons on this one.

Jan 8, 2001



Re: Is the yield; 16%, 13% or 8.5% ? - Posted by David Butler

Posted by David Butler on January 09, 2001 at 15:39:13:

Hello Doug,

You are correct with regard to your observation regarding the NPV on balloon payments - however, the danger factor is a reflection of risk rating, and like anything else, a blanket statement in terms of absolutes is never a sound caveat.

Notes, like any investment, should be evaluated on a number of variables - and balloons are one more part of the mix. You may find it helpful to review the discussion down below at:
particularly with regard to balloon notes, as discussed in point #3 of that thread.

And, if I may suggest, a $40 investment in Jon Richards’ excellent financial workbook on notes, CALCULATOR POWER, would be a very worthwhile place to start in gaining a full understanding of the math that lies behind the note business… and the numerous scenarios that one may contemplate or encounter!

Hope this helps, and enjoy your number crunching :wink:

David P. Butler