When looking at buying a performing note, how does one go about pricing it's value? It seems to be it would be a simple present value calculation (like one would do with a bond) but it's clearly NOT how most people appear to be pricing them. In fact, it looks like people are valuing their performing notes without any real calculations.
Am I wrong?
Hello @Patrick Britton ! Great question. When seeking to purchase a performing note, you must first decide the rate of return that you seek to receive from the asset, taking into account the risk profile of the note (seasoning, lien position, LTV, etc). Using that rate of return, along with the payment amount and remaining number of payments, you can calculate the value of the note on your financial calculator. The rate of return that you seek is the subjective variable that drives the discount on the note. Good luck!
@Fred Moskowitz thanks Fred! I was wondering how subjective the assumptions, interest rate, term, etc., were and your answer clarifies that :)