Posted by Joseph on May 14, 1999 at 14:08:16:

Hello,

I am a newbie to the discounted notes/mortgages arena. I have recently devoured John Stefanchik’s book “The Stefanchik Method.” In one section of the book,pp 144-149, he discusses the issue of paying off a partial early. He uses the following information for his example:

He pays $10,000 for 36 payments of $775 ($27,900)

Interest- 11.22%

He says, an investor must set up a separate amortization table with a starting balance equal to the present value of the future cash flow. I interpret this as the present value of $27,900. Anyway, his table starts at $23,598.16.

However, my calculations for present value give me a different figure and I have been unable to reconcile the difference in our figures. I have used the following formula P=B(1 + r/k) raised to -kt (-kt is the exponent)

B=dollars payable t years from now (or 27,900)

k=times per year interst is compounded (annually or 1 time)

t=years (3 years)

=> P = 27,900 (1 + .1122/1) to the negative 3

= P = 27,900 (1.1122) to the negative 3

= P = 20,279.42

My calculations tell me to start the amortization table at 20,279.42…NOT 23,598.15. Can anyone clarify this matter for me.

Moreover, regardless of the correct starting balance, how does an investor justify or explain the difference in what he is paying the note holder and what the present value of the money is. For example, how would I explain to a note holder how I arrived at the 20,279.42. If I said it is the present value of the 27,900…wouldnt he scratch his head and say, “wait a minute! if that is its present value, why arent you paying me that amount?”

I apologize for the length of this message, but it is my hope that an in depth specific question will return some in depth and specific answers. Thank you.

Joseph Turner