Re: Yield? - Posted by Tim (Atlanta)

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.

Hope this helps.

See what I mean?