# Discounting a Mortgage Note

If you were to buy a \$20,000 mortgage note, 15-year term, 8% interest, how would you determine the price? Would you pay \$20,000? Or, would you pay less? If your investment strategy was to have each invested dollar earn 13%, you couldn’t buy that note for “full price,” since you would only be earning 8% interest.

To get your 13% return or yield, you would have to pay less than the \$20,000. This is the concept of discounting mortgage notes. Though you pay less for the note, the monthly payments won’t change. They’ll still be \$191.13 each month. So, the question really is: If you’re receiving payments of \$191.13 for 15 years, how much must you pay to get a 13% yield?

First calculate the parameters of the original note:

Calculate the Pmt

 N I/Y PV PMT FV 180 8% 20,000 0 This is the note you are buying.

We want to calculate the Present Value of this note at our required yield. We put the yield in the I/Y register and then calculate the PV.

Calculate the PV

 N I/Y PV PMT FV 180 13% 191.13 The PV is the amount you will pay for this cash flow to get a 13% yield.

Answer: PV = \$15,106.20. By paying \$15,106.20 for this stream of payments, you will have a yield of 13% per year. You would present this offer to the seller of this note.

 What You Have Learned: Discounting means raising your “yield” in the I/Y column and calculating the PV or Present Value to find the price you will pay for the note. Box #1: Pmt = \$191.13 Box #2: PV =\$15,106.20

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