Albert is tired of getting the 1% return that he has been getting at the bank and is looking for a new investment vehicle. He hears about purchasing mortgage notes and decides to learn more about investing in notes. After doing a considerable amount of research and studying, Albert finds a note for sale that is secured by good collateral. The note has a balance of $32,000, has 120 payments left, and has payments of $350 every month and is fully amortized, so it will be paid off in 120 months. Albert is looking to get a 15% return on his money. How much is Albert willing to pay for the note?
Answer (buttons to push into HP 10bii calculator)
N = 120
I = 15 (his desired return)
PV = ?? (This is what we are solving. This is the amount that Albert will pay. Note that the current balance of the note is not needed to determine the interest that Albert wants to earn)
PMT = 350 (this is what Albert will receive each month if he buys the note)
FV = 0 (the note is fully amortized, so it is paid off after 120 months)
Albert is willing to pay $21,694.00 to purchase the note so that he gets a return of 15%. Note that in the calculator, $21,694 will be negative as Albert has to pay this amount out of his pocket to get the positive $350/month.