Commission in Discounted Note Business

This post will show you how to figure commissions using a financial calculator when buying and selling discounted notes.

Sally Seller needs cash to buy a new Jaguar to impress a potential boyfriend. Her only asset is a $100,000 note she took back when she sold her home 5 years ago. You want to broker the note to an investor. The Jaguar costs $80,000. Can you help Sally and still make a commission? We must first calculate the value of the note she is selling, then make her a purchase offer, and then calculate the price the investor will pay for the note. In each case, we need to know the yield or interest rate at which we can buy and then sell the note. You think you can buy Sally’s note for a 10.5% yield and sell it to an investor to yield them 9%.

First verify the terms of the original $100,000, 8%, 360 month note.

Then calculate the balance due on the note we are brokering. We will use the Present Value method. Put in the payments remaining and then recalculate the Present Value (PV).

Box #1: Calculate the PV

N I/Y PV PMT FV COMMENT
300 8 ____ 733.76 0 N= the payments remaining

PV is the present value of the note and is the cash flow you will be buying.
You will buy the note from Sally to yield you 10.5%

Box #2: Calculate the PV

N I/Y PV PMT FV COMMENT
300 10.5 ____ 733.76 0 I/Y= the yield to calculate the PV, your purchase price

The PV is the price you will quote to Sally for the whole note.

Sally accepts your price of $77,713.85, and your adept explanation of the discount. She is already picturing herself in the Jaguar with Mr. Right.

You can now broker the note directly to the investor for the 9% yield. Your profit is the difference between what you give Sally and what you get from the investor.

Box #3: Calculate the PV

N I/Y PV PMT FV COMMENT
300 9 ____ 733.76 0 I/Y= the yield used by the investor for their buy

PV is the price the investor will pay for this note.

If you calculated correctly, you will make a commission of $9,722.18. Sally has the car and cash, the investor has a good note, and you have a great commission.

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