THE SCENARIO
My friend John recently contacted me about a note he was considering purchasing. He's a smart guy, but is new to notes, and wanted a second pair of eyes on the analysis. Fair warning: this has multiple parts, but none of them are overly complicated.
The note has a 30-year term, fixed interest at 9.5%, and $76,000 originally owed (the 'face amount' or 'face value'). Some quick calculator work revealed that the monthly payment is $639.05.
John knows that it's good to get a discount when you buy notes, and wanted to make sure he got at least a 45% discount. The seller was offering the note for $76,000 x (100% - 45%) = $41,800. So far so good.
The problem arose when more details about the note emerged. Namely, 25 of the 30 years have already elapsed, and John would be purchasing only the last 5 years (60 payments) of the note.
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