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Question: Why wouldn’t I want to purchase a PN with highest possible rate if I am intending to sell a partial?
* Material: PN training modules, module #3 (Nov 12, 2015). The module discusses pricing of performing notes when we are interesting in selling a partial. The trainer said to purchase notes with interest rates <8%. The logic used was that the buyer of the note would expect to make at least the yield on the note.
* I contrived three examples below. The best investment from a $ perspective is the one
with the highest interest rate (intuitively obvious)
* Ex1: 30yr note for 100k at 10%, 330 pmts of $877.57 remaining
Partial could be sold for $74.5k, giving investor 120pmts yielding 7.33%.
* Ex2: 30yr note for 100k at 8%, 330 pmts of $733.76 remaining
Partial could be sold for $62.5k, giving investor 120pmts yielding 7.25%.
* Ex3: 30yr note for 100k at 3%, 330 pmts of $421.60 remaining
Partial could be sold for $36k, giving investor 120pmts yielding 7.19%.
* What am I missing?$100k loan, 360mo, 330 mo remaining 10% 8% 3%
Payment $877.57 $733.76 $421.60
Partial term 120 120 120
Partial price $74.5k $62.5k $36k
Investor return 7.33% 7.25% 7.19%Follow-up: A second reason was given (November 12, 2015, 50min, 29seconds) for buying a note with an interest rate less than that offered to the investor.
* Czarina: “The reason why I also want to have an interest rate that is higher than what the note is written at is because if it pays off early, my investor still makes a little bit of money. If I sell it to them on a coupon clipper and it pays off early, then they don’t really make anything because all of their investment was in the fact that the person was going to continuously pay.”
* I don’t understand this either. If the note pays off early, the investor would get payed
off early, ultimately receiving a higher yieldin reply to: Partials
