Re: Yield Comparison based on CC Money - Posted by John Behle

Posted by John Behle on December 19, 1998 at 11:38:51:

From a calculator standpoint, determining your yield is best done through calculating the IRR or Internal Rate of Return. It’s going to be a challenging and complicated process on the TI BAII. It’s great for simple cash flows, but gets left in the dust when they become complex. Go with the HP17B, 19B or 12C.

What you would do is take your cash flow from the note on a monthly basis. Payments in minus payments out - leaving the net positive (or negative) cash flow. For a simple example:

Payment in $500 for 60 months.

Payment out $300 for 36 months.

The cash flow would be $200 per month for the first 36 months, then $500 per month for the remaining 24. You have two cash flows. The first is a “Series” of payments and is an easy calculation on any calculator. The second is a “Future Series” - which is a series of payments that begins at a future date. It’s a more complicated calculation that is best done through the “uneven cash flow” functions built into the calculator. You can do it on the TI through two method. One is the “Double discount”. Discount the series of payments as if it started today. Then take that discounted amount and discount it again to account for the time period (in this case 36 months) before it starts. Another method is the “Subtraction” method. I calculate the cash flow as if it began today and carried throught the full term (60 months). Then I calculate the value of what I didn’t receive (36 months) and subtract that - leaving me the value of the cash flow I have (24 payments of $500 begining in 36 months).

In the question of what is your yield? If you have borrowed 100% of the money on credit cards, then your yield is infinite. If you have any investment, then it is the amount that goes into the calculator as the “Initial Flow”. You then enter the cash flows and calculate for the internal rate of return. It’s a one week course in the CI101 course for the Realtor’s National Marketing Institute, so I won’t attempt it here. When your yields are high, the IRR is also very inaccurate based on assumptions that are made by the calculator.

As far as your particular example, I would have to know the payments coming in on the Lonnie deal and the payments, rate and terms of the credit card loans. If your investment yield is high enough and secure, credit cards can be a viable option. It just depends on the terms.

If you want to throw us some exact or hypothetical figures, I’ll run it through the calculator.