Thanks, but I don’t know how my question gravitated to math. My question was,“Translate the meaning of yield into a useful definition.”
Russ Dalbey of Winning in the Note Business says that “Yield is your total return on an investment over a given period of time.” That’s all I was asking for.
My notes, by the way, are for 20.9% APR each (I have the amoritization tables for each loan), and I bought them at discount, bringing the amount to 38.8%. I’m not sure how you got 13 percent out of it.
Everybody was trying to be helpful and I appreciate it.
I hate to expose my dumbness to the world, but I need someone to explain “Yield” to me. I punched in all the numbers and got a yield of 65.89 percent. I know how to figure it and I know bigger is better, but what does it mean now that I’ve got it. I know it means that it should be a good investment, but what do the numbers themselves represent. Is it a percentage of my investment, what? I just don’t get it.
Yield is your $$$ return on a given investment. For a simplified example if you put $1,000 in a bank CD and the bank was offering 6% per year interest, your CD would be worth $1,060 and the end of one year and your “yield” would be 6%. Now if you put your investment of $1,000 into an investment vehicle that provided a 65.89% yield, your $1,000 would grow to $1,658.90 in one year! A yield of 65.89% is as Lonnie would say “good enough”.
Thanks for you input.
Isn’t what you are describing just old-fashioned APR (annual percentage rate). If I multiply my numbers back by 65.89% per year, it comes out to much more than I will actually get. I don’t believe that is the correct definition of yield. Here are the numbers:
N=32.00; I/Y=65.89; PV=-41,082.05; PMT=1,984.32; FV=63,490.53.
I tell you, I would love to get 65.89 APR on that because I would get back more the first year ($27,068) than I will actually get after 32 months ($22,192). The APR is more like 22 percent, not 65.89 percent.
Lets take my previous example and use it as a loan not a CD.
PV=$1,000 I/Y=65.89 N=12 PMT=$115.97 FV=$1,391.64
When I receive my first pmt of $115.97, $54.91 of the pmt is interest and $61.06 is principal. $54.91 x 12 = $658.92 which relates to a 65.89% annual yield on my principal that month. The next month the loan is now only $938.94 because I received $61.06 of my principal the previous month. So my second payment of $115.97 only $51.56 is interest which equals a 65.89% annual yield on $938.94. Then another $64.61 would be deducted from the principal.
Now I think you need to check your calculations because my computer tells me that your payment should be $2,753.50 based on a pv of 41,082.05 and an n of 32 and an i/y of 65.89.
A true 65.89% yield would require that you continued to reinvest the payments received at the same 65.89%. An interest only balloon payment would represent a true yield, as the principle earns the I/Y for the entire term. Correct me if I’m wrong!
I am using real numbers for my calculations. I paid cash of $41,082.05 for 8 notes that have payments of $1,984.32 per month for 32 months, for a return of $63,490.53.
My calculator says that’s a yield of 65.89%. But what does that mean. True APR is 34.576 interest for 32 months.
Posted by Tim (Atlanta) on March 21, 2001 at 07:27:21:
I believe that you are confusing the yield on the total deal with the annual yield. In all of Lonnie’s materials, he uses annual yield instead of the total yield over the life of the note.
In your situation, you paid $41,082.05 in cash now (PV) for 32 payments (N) of $1984.32 (PMT). Solve for I, and I get 34.65%. That is annualized yield.
Maybe I am missing something here, but for the total yield, I get (63490.53 - 41082.05)/41082.05 = 55%. But let’s say that I am wrong, and the total yield is 65%.
If I am only looking at the total yield, I would also buy the following cash flow for 41082.05 : 48 months at $1322.72, right? This would give me 48 * 1322.72 = 63490.56, which is the same return as the 8 note portfolio you just bought for 32 months. The annualized return for the 48 month portfolio is significantly less. PV = 41082.05, N=48, Pmt=1322.72, solve for I=23.27%. A much worse deal when we consider the annualized yield.
You see, the total yield calculation does NOT include a time component. It occurs to me that this is the critical element you are missing. The true time value of money.
Marshall,
Here is how I learned to do this:
Big Number
Little Number
= Total return (return on investment in $)
/ Big Number
= Total percentage (return on investment in %)
Marshall using your numbers for this example:
$63,490.53 Big Number (Total dollars)
-$41,082.05 Little Number (what you paid)
=$22,408.48 Total dollars returned
/$63,490.53 Big Number
=35.2942% Total percentage returned
Now you need to carry this a little further to get your annual percentage (r.o.i.)
35.2942% Total percentage returned
/32 Months of note
=1.1029% Monthly percentage roi
x12 Months of a year
=13.2353% Your annual return on investment
Is this good enough? I don’t know. It’s up to you!