Re: What is Lonnie talking about? - Posted by Jeff (Al)

Posted by Jeff (Al) on May 10, 2001 at 17:13:45:

Brett,

This is kinda long, but here’s the numbers to show you how Lonnie gets a 67% yield. Key in the following into the financial calculator:

PV = -2500 (amount Lonnie has in the deal)

PMT = 174.37

n = 30 (months)

Solve for i. On my HP-12C, I get back 5.62%. This 5.62% is the periodic interest rate that Lonnie is earning on the deal, ie. the monthly interest rate. Lonnie gets to the 67% Annual yield by multiplying this number by 12 (12 * 5.62 = 67.48% Annual Yield).

Now you CANNOT take the 67.48% and mulitply it times the $2500 investment and get any results that make sense. This is because the principal balance is declining with each payment that is received. The best way to understand the 67% is to look at the amortization schedule and calculate the interest received over a 1 year period versus the Average Principal Balance for that Year. For example, looking at the amortization schedule below, you see that:

Interest rec’d for Months 1 thru 12 = $1534.85

Calculate the Average Prin. Bal using the $2500 initial investment for Month 0 then add in the next 11 Months ending balance, should get

Avg. Year 1 Principal Balance = $2274.51

NOW if you multiply the Annual Yield (67.48%) times the Average Year 1 Principal Balance it SHOULD equal the amount of Interest received for the first year:

.6748 * $2274.51 = $1534.84 in interest received. As Lonnie would say GOOD ENOUGH!!.

Can then repeat for Year 2 making sure you use the Principal balances from Months 12 thru 23 and Only the interest received in the next 12 months and it should come out right on 67.48%.

Hope this helps clarify the numbers.

AMORTIZATION SCHEDULE

Principal borrowed: $2500.00

Annual Payments: 12 Total Payments: 30

Annual interest rate: 67.48% Periodic interest rate: 5.6233%

Regular Payment amount: $174.37 Final Balloon Payment: $-0.52

Note: the following numbers are estimates. See the amortization schedule for more accurate values.

Total Repaid: $5230.58

Total Interest Paid: $2730.58

Interest as percentage of Principal: 109.223%

Payment Principal Interest Cum Prin Cum Int Prin Bal

…1…33.79…140.58…33.79…140.58…2466.21

…2…35.69…138.68…69.48…279.26…2430.52

…3…37.69…136.68…107.17…415.94…2392.83

…4…39.81…134.56…146.98…550.50…2353.02

…5…42.05…132.32…189.03…682.82…2310.97

…6…44.42…129.95…233.45…812.77…2266.55

…7…46.91…127.46…280.36…940.23…2219.64

…8…49.55…124.82…329.91…1065.05…2170.09

…9…52.34…122.03…382.25…1187.08…2117.75

…10…55.28…119.09…437.53…1306.17…2062.47

…11…58.39…115.98…495.92…1422.15…2004.08

…12…61.67…112.70…557.59…1534.85…1942.41

…13…65.14…109.23…622.73…1644.08…1877.27

…14…68.80…105.57…691.53…1749.65…1808.47

…15…72.67…101.70…764.20…1851.35…1735.80

…16…76.76…97.61…840.96…1948.96…1659.04

…17…81.08…93.29…922.04…2042.25…1577.96

…18…85.64…88.73…1007.68…2130.98…1492.32

…19…90.45…83.92…1098.13…2214.90…1401.87

…20…95.54…78.83…1193.67…2293.73…1306.33

…21…100.91…73.46…1294.58…2367.19…1205.42

…22…106.59…67.78…1401.17…2434.97…1098.83

…23…112.58…61.79…1513.75…2496.76…986.25

…24…118.91…55.46…1632.66…2552.22…867.34

…25…125.60…48.77…1758.26…2600.99…741.74

…26…132.66…41.71…1890.92…2642.70…609.08

…27…140.12…34.25…2031.04…2676.95…468.96

…28…148.00…26.37…2179.04…2703.32…320.96

…29…156.32…18.05…2335.36…2721.37…164.64

…30…165.11…9.26…2500.47…2730.63…-0.47

Hope this helps!!

Jeff