Basic Calculator Course

Transcription

1 Basic Calculator Course For use in evaluating notes and other income streams. Purpose: This course is intended to provide a basic introduction to the use of a financial calculator in evaluating notes and other income streams. At the end of the course, you should be able to perform the following functions using your financial calculator: Determine the number of payments, interest rate, principal balance or payment amount for a given note or income stream. Determine the discounted yield of a note. Determine how much to pay for a note given a desired yield. Calculate yields and discounts on partial purchases. Discount complex cash flows (those with more than one income stream). Note: This course is intended for use with HP financial calculators. If you use a calculator other than HP, your keystrokes may be different, and slight rounding differences may occur. All examples used in this course assume 12 payments per year. Please ensure that your calculator is set accordingly. All examples also assume that payments are made at the end of the corresponding period. Please set your calculator to END mode. Consult your calculator manual if necessary. Special thanks to Bill Tan, an original National Note franchisee, who provided the materials used to create this course.

2 Part One: Variables All calculations pertaining to the discounting of notes use the time value of money formula. This formula contains five variables. They are: N - Number of Payments, or Periods. The could also be called Term. It is important that you enter the proper number of periods. For instance, if you are attempting to calculate the payment on a five year note with monthly payments, you would enter 60 (5 years X12 monthly payments). I/YR - This is the yearly Interest Rate or Yield. If you have set your payments per year correctly as mentioned above, the calculator will most likely automatically divide this number by the periods per year to determine the periodic interest rate. PV - This is the Present Value. It represents the face value of the note, balance or discounted value. On HP calculators, always change the sign to a negative number, which signifies an outflow of funds. PMT - This is the Payment. It is used to enter or calculate the regular periodic payment of an income stream. Future Value - This represents Future Value, and will be used to calculate payments that occur in the future, such as balloon payments, final payments or future balances. For fully amortizing loans or current income streams, the value will always be 0. Calculating Variables When calculating ANY of the five variables, simply enter the four known variables into the calculator, and press the button for the unknown variable last to find the solution. NOTE: Most calculators will automatically store 0 as FV, so it may not be necessary to enter this value for every calculation.

3 Problem 1 You have received an offer from a buyer to purchase your property. Because of the scarcity of traditional financing, they have offered you $100,000 but would like to make you 360 monthly payments at 6% interest per annum. If you accept this offer, what will be the amount of the payment you will receive each month? Solve for the Payment: N = 360 I/Yr = 6 PV = - 100,000 PMT = FV = 0 360, N, 6, I/YR, , +/-, PV, PMT Problem 2 As a business owner, you would like to purchase a retail location for one of your stores, but would like to know the price of the building you can afford. After speaking to a commercial lender, you find that interest rates are currently 8%, and lenders are offering loans with 240 month terms. You have allotted $1,500 of your hard- earned cash flow to the monthly payment at this location. What can you afford to pay for your new building? Solve for the Present Value: N = 240 I/Yr = 8 PV = - 179, PMT = 1,500 FV = 0 240, N, 8, I/YR, 1500, PMT, PV

4 Problem 3 You are preparing to sell a rental home that you have owned for several years. The home is now paid off, and you would like to use it to generate passive income without the hassles of management. You decide to offer seller financing in order to produce income in your retired years. An appraisal shows the value of the home to be $150,000, and you would like a payment of $1,100 for 360 months. What rate of interest should your charge? Solve for the Interest Rate: N = 360 I/Yr = 7.99 PV = - 150,000 PMT = 1100 FV = 0 360, N, , +/-, PV, 1100, PMT, I/YR Problem 4 You create a note on the sale of a property. You plan to charge 10% interest on the $200,000 balance, and would like to collect a payment of $2,000. How long will it take for the loan to be paid off? Solve for the Number of Payments: N = 216 I/Yr = 10 PV = - 200,000 PMT = 2,000 FV = , +/-, PV, 2000, PMT, 10, I/YR, N

5 Part Two: Discounting The following process applies to discounting notes and other cash flows. Walking through each step will allow you to determine yields and discounts on the most complex cash flows. Identify all cash flows: Solve for the unknown factors. Discount each cash flow separately. Add cash flows for totals. Problem 5 Full Purchase You have been presented the opportunity to purchase a $50,000 note that bears interest at 8% per annum and calls for 60 regular monthly payments of $1, What amount can you pay for this note in order to yield 15%? Because we have the note that tells us all the values, there is no need to solve for a missing variable. However, it s always a good idea to enter them in and check the payment amount against the note to ensure accuracy of the original amortization schedule (You d be surprised how often they are incorrect). Once you have input all the variables from the note, the process is simple. Just replace the interest with the desired yield, and then press the PV key to determine how much you will pay for the note in order to achieve the 15% yield. Original Note Discounted Note N = 60 N = 60 I/Yr = 8 I/YR = 15 PV = - 50,000 PV = -42, PMT = 1, PMT = 1, FV = 0 FV = 0 60, N, 8, I/YR, 50000, +/-, PV, PMT [verify payment with note], 15, I/YR, PV What can you pay for the 60 payments if you want the following yields: 45, , , , % 18% 21% 24%

6 Problem 6 Partial Purchase Using the same note from Problem 5, what could you pay for the note if you only want to purchase the next 30 payments and achieve the same target yield? Remember, solve for the payment on the original note, then replace the variables that are changing and solve for the discounted value. Original Note Discounted Note N = 60 N = 30 I/Yr = 8 I/YR = 15 PV = - 50,000 PV = 25, PMT = 1, PMT = 1, FV = 0 FV = 0 60, N, 8, I/YR, 50000, +/-, PV, PMT [verify payment with note], 30, N, 15, I/YR, PV What can you pay for the 30 payments if you want the following yields: 26, , , , % 18% 21% 24%

7 Problem 7 Remaining Balance Using the same note above, what will the remaining balance of the note be after the first 30 payments have been made? Finally, you get to use your FV key! All you need to do is enter the original note variables, and then replace the Number of payments as shown below, and solve for FV. Original Note Discounted Note N = 60 N = 30 I/Yr = 8 I/YR = 8 PV = - 50,000 PV = - 50,000 PMT = 1, PMT = 1, FV = 0 FV = 27, , N, 8, I/YR, 50000, +/-, PV, PMT [verify payment with note], 30, N, FV What is the balance after the following number of payments? 42, , , ,

8 Problem 8 Balloon Payment A lender has offered to sell you a $30,000 note that bears interest at 7% per annum and has interest only payments of $175 for 60 months, after which then entire amount of $30,000 is due. However, the lender would like to keep the monthly payments of $175 and only sell you the $30,000 payment. If your target yield is 11%, what can you pay for the $30,000 payment you plan to receive 60 months from the date of purchase? Enter the variables you know into the calculator. Enter 11% in I/YR because 11% is your target yield. Enter 60 in N because 60 is the number of months until you receive your balloon payment. PMT remains 0 because you re getting 0 regular payments for the 60 months leading up to the balloon, and Enter 30,000 in FV, because 30,000 is the amount your plan to receive 60 months from now. Balloon Note N = 60 I/Yr = 11 PV = 17, PMT = 0 FV = 30,000 60, N, 11, I/YR, 30,000, FV, PV What can you pay for this note if your target yields are as follows? 16, , , , % 18% 21% 24%

9 Problem 9 Balloon Term A friend of yours loaned money to his brother, but now wants to sell the note to ease familial tensions caused by the debt. The original note states that $60,000 was lent at a 5% Interest Rate and was to be repaid in 48 months. The loan was made 12 months ago, so it is now due in 36 months. What can you pay your friend today for his note if your desired yield is 12%? Balloon Note N = 36 (The number of months until you receive the balloon payment.) I/Yr = 12 (Your desired yield.) PV = 41, PMT = 0 (This is 0 because you receive no payments for the 36 months.) FV = 60,000 (The amount of the payment you will receive in the future.) 36, N, 12, I/YR, 60,000 FV, PV Solving for the present value given a different number of months is simply a function of re- entering a new value for N and solving for PV. What is the value of the balloon if it is due in the following number of months? 53, , , ,

10 Problem 10 Amortized with Balloon Let s assume you would like to purchase $200,000 note, amortized over thirty years, 6%, with the remaining balance due in 120 months. What can you pay for this note to achieve a yield of 12%? This problem is complex in that you must identify, solve for, and discount different cash flows. However, you ve already performed the separate calculations necessary in the previous questions. Step One: Identify the Cash Flows In this example, we have two cash flows: Cash Flow 1 Regular Payments (Solve for the payment amount) Cash Flow 1 (CF1) = 120 Payments of 1, Original Note Discounted CF1 N = 360 N = 120 I/Yr = 6 I/YR = 12 PV = - 200,000 PV = 83, PMT* = 1, PMT = 1, FV = 0 FV = 0 * Copy PMT from Original Note above to all PMT fields on this page. Cash Flow 2 (CF2) Balloon Payment Cash Flow 2 = 1 Payment of 167, It is necessary at this point to determine the balance after 120 payments of the original note have been made, because the balance at that point will be the balloon amount. This will become our Future Value for calculating the balloon discount. Original Note Balance after 120 Payments N = 360 N = 120 I/Yr = 6 I/YR = 6 PV = - 200,000 PV = - 200,000 PMT = 1, PMT = 1, FV = 0 FV = 167,371.44

11 Problem 2, Cont. Discounted Balloon (CF2) N = 120 I/Yr = 12 PV = 50, PMT = 0 FV = 167, (From FV in Balance after 120 Payments on previous page.) Now that you ve determined the discounted value of each cash flow, add them together. Discounted Payments 83, (PV under Discounted CF1 ) Discounted Balloon + 50, (PV under Discounted Balloon ) Total Discounted Value = 134,290.63

12 BONUS Wraparound This problem is optional and will be reviewed during the live course. A wraparound note is one that is created on a property that has existing debt. The wraparound note is created subject to the existing debt. In the simplest example, the existing debt remains in first position and the new wraparound note takes second position. Example A Seller sold their home for $100,000 using seller financing at 10% for 360 months using a wraparound note. This means the Buyer will make payments to the Seller. However, the Seller still has a loan on the property that has 37 payments of $ before it is paid off. When a payment is made on the wraparound note, it is collected by the Seller, and the Seller then makes the payment to the loan that he had when he sold the home. This loan is referred to as the underlying loan or simply, the underlying. What can you pay for the note today if your target yield is 12%? Determine the payment on the Wraparound Wraparound (Solve PMT) N = 360 I/Yr = 10 PV = - 100,000 PMT = (Wrap Payment) FV = 0

13 Cash Flow 1 (CF1) When you buy a wraparound note, you receive a payment on that note, but you also have to make a payment on the underlying loan. To determine your cash flow, use the following formula: Wrap Payment Underlying Pmt Net Payment = The first cash flow on the wrap around is: 37 payments of (From Net Payment above) Discounted CF1 N = 37 I/Yr = 12 PV = -12, PMT = (From Net Payment above) FV = 0 Cash Flow 2 (CF 2) After the first 37 payments, the underlying loan will be paid off. That means you keep the entire amount of the payments for the remaining 323 payments. The second cash flow on the wraparound is: 323 payments of (PMT from Wraparound on previous page.) Determining the present value of Cash Flow 2 takes two steps: Step One Find the value of Cash Flow 2 at the time it starts in 37 months. N = 323 I/YR = 12 PV = -84, PMT = (PMT from Wraparound on previous page.) FV = 0

14 Step Two Find the value of Cash Flow 2 today. N = 37 (The number of months until the payments start.) I/YR = 12 PV = -58, (The value of future payments TODAY) PMT = 0 FV = 84, (Enter PV from Step One above) Now that you ve determined the discounted value of each cash flow, add them together. Disc. Payments , (PV under Discounted CF1 previous pg.) Disc. Payments , (PV under Step Two above) Total Discounted Value = 70,598.95