Okay, time for part 2. To recap, the scenario from Part 1 is as follows:
THE SCENARIO
I came across a note for sale. The terms of the note are as follows:
Original balance: $6,000
Unpaid balance as of June 2: $4,560
Term: 5 years
Interest Rate: 0
Payments: $100 per month
If I buy it, make the purchase on June 2, and the first payment I'll receive will be the July payment.
Every February, the borrower pays off $1,000 in order to accelerate the note paydown.
QUESTION
If I buy the note for its face value ($4,560), what will my yield (or Return On Investment, or the Internal Rate of Return of the deal) be?
SOLUTION
Note: This requires Uneven Cashflows. Don't freak out, it's going to be okay.
Uneven Cashflow Setup:
Initial Cashflow = -$4,560
Payments of $100 times 6
Payment of $1,100 times 1
Payment of $100 times 11
Payment of $1,100 times 1
Payment of $100 times 6
Payment of $60 times 1.
Graphically, the setup looks like this:
The Cashflow daigram looks like this:
Solving for IRR/YR, I find that if I buy the note at no discount, my yield is 0.00%.
Not as impressive as I'd like, but it makes sense since the note is written at 0% interest.
