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A Note On Offer
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THE SCENARIO
A friend of mine recently told me she wants to sell a couple of notes that she owns, and that she won't take a discount (which means that she wants to be paid exactly what the unpaid balance of the notes are today in order to hand over the note).
One of the notes has original terms that are as follows: 10 year duration, fully amortizing, 12% interest, monthly payments, $100,000 original balance.
The question: The note originated 21 months ago. How much would it cost me to buy it?
THE SOLUTION
This one has two parts*, both of which are straightforward.
- Determine the monthly payment
- Find the unpaid balance today
* This is one of a couple of ways to solve this problem.
First things first, make sure the calculator is using 12 Payments per Year.
Part 1: Monthly Payment
N: 120 (The note had a 10-year term, which is 10 x 12 = 120 months)
I/YR: 12 (The note has a 12% interest rate)
PV: -100,000 (My friend originally loaned the borrower $100,000)
PMT: (This is what I'm trying to find)
FV: 0 (The note amortizes fully)
The borrower pays $1,434.71 per month on the note.
Part 2: Today's Balance
N: 21 (21 months have passed since the note was originated)
I/YR: 12 (The note has a 12% interest rate)
PV: -100,000 (My friend originally loaned the borrower $100,000)
PMT: 1,434.71 (From Part 1)
FV: (This is what I'm trying to find)
The borrower still owes $89,897.70 on the note.
What do you think? Would you buy the note (if you had the money to spare)? Why or why not? Is there more information you'd need before making that decision, and if so, what is it? Let us know in the comments!
