Updated about 13 years ago on . Most recent reply
How much of a discount to expect when selling note?
ex. $100,000 principal, how much lump sum payment would be typical?
Most Popular Reply
There are many factors a note buyer takes into account when buying a note.
The key is understanding the difference between the discount and the yield. This is a common mistake made by both buyers and sellers.
The discount required to get to a certain yield is going to be a function of the (original) terms of the note. A short-term note will require a smaller discount to get to a yield vs. a longer-term note.
Example:
A $100,000 note at 6% interest amortized fully over 10 years (120 months) results in a $1110.12 payment.
That same note amortized over 30 years results in a $599.55 payment.
To get to a 12% yield, the 10-year note would have to be discounted to $77,381.87. That's a 22.6% discount.
To get that same 12% on the 30-year note, it would have to be discounted to $58,287.30. That's a 41.7% discount.