Posted by Jon Richards on June 22, 2002 at 08:07:41:
You are correct we buy notes at a discount, but seldom use the word “discount.”
Rather we buy a note to “yield” us a certain percent return. That “return on our investment” or “interest” is determined by the quality of the note.
Your $100,000 farmland note written at 10% interest amortized over 30 years would have monthly payments of $877.57. If I bought it to “yield” me 13%, or to give a 13% “return” I would buy it for $79,332.
If the same note were all due and payable in 60 months, with a balloon of $95,574, I would buy it for $89,162. This is also for a yield or return to me of 13%.
The difference is in the time until I would get my money. Long term notes have severe discounts.
Details of these calculations are in our book Calculator Power, for sale on this site for $39.95.
Hope that helps.
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