Adventures in Note Land

Note: You can use any financial calculator to do this problem, but if you want the BEST, you can get our 10bii Financial Calculator for iOS, Android, Mac, and Windows!

THE SCENARIO

Working with a note broker, I find a note that I can purchase. The terms of the note are as follows:

• Original term: 20 years (240 months)
• Amortizes fully
• Amount borrowed: $100,000
• Borrowing rate: 7.75%
• Number of payments made: 44
• Number of months since the last payment: 8 (note is delinquent)
• Value of collateral: $75,000 (original value: $125,000)
• Due to late fees and charges, the borrower currently owes over $9,000 in back payments.

THE QUESTION

A) What is the monthly payment on the note?

B)How much was owed at the end of the last payment that was made?

C)Assuming that you could purchase the note for $55,000,what would your yield be on the note, assuming that you could get the borrower paying again (forgiving the $9,000 in back payments owed, and starting up on the next unpaid payment)?

THE SOLUTION

A) What is the monthly payment on the note?

N = 240

I/YR = 7.75%

PV = $100,000

FV = 0

PMT = $820.95

The monthly payment on this note is $820.95.

B)How much was owed at the end of the last payment that was made?

N = 46

I/YR = 7.75%

PV = $100,000

PMT = $820.95

FV = $90,655.15

After the last payment was made,$90,655.15 was owed.

C)Assuming that you could purchase the note for $55,000,what would your yield be on the note, assuming that you could get the borrower paying again (forgiving the $9,000 in back payments owed, and starting up on the next unpaid payment)?

N = 196

PV = -$55,000

PMT = $820.95

FV = $0

I/YR = 16.72%

Your yield would be 16.72% if the borrower would begin paying again.

Read the next part in this series!