Arriving at Effective Rate/Yield for a Note with a Balloon

[Ray Trounday]

I have been working my HP 10bii to arrive at the Effective Rate/Yield on purchase of a note with a balloon.  Lets set aside for the moment the likely-hood of having the borrower actually pay the balloon.  In most cases, borrowers will need to refinance prior to having the balloon due.  I digress back to my example:

Loan Type: 5 year loan with balloon (Payment amortized over 30 years

Original Loan Balance: 100000

Rate: 9.99

Payment: -876.83

Amortization Term: 360

 I will need to first calculate the balance that is due on the 60th payment.  So, I do the following:

N: 60

I/YR: 9.99

PV: 100,000

Payment: -876.83

Calculate FV

Balance due: -96,957.91

Lets say that I buy the full note for 70k. So, I modify my PV from 100k to 70k leaving everything else the same from above

PV: 70,000

N: 60

Payment: -876.83

I arrive at Effective Rate/Yield: 19.56

Thoughts on the correctness on the above?

[Andy Mirza]

@Ray Trounday I haven't checked your work but it seems intuitively correct to me. However, I think IRR would be a lot more of a useful metric because it will include your the delta between your purchase price and the balloon payment. With regular cash flows over a five year period, it should be pretty quick to figure out, even on your calculator (as opposed to excel). Just my thoughts....