The Cash Flow Exam Challenge

[Young Spark]

Hey Everyone,

Here's a new topic that I decided to start and should be lots of fun to see some responses from. Its one to challenge your mind and is not for those who have bad tempers (as it'll puzzle you a bit.)

As many know, I am a cash flow consultant and as a cash flow consultant, I do calculations to figure out "numbers" for notes. So I figure I'd test everyone on the board about cash flow notes. You don't have to be an expert and its ok if your a beginner, I just wanted to start a topic to see if one lucky person out there is bright.

Now the examples (some may be easy) are a bit hard so I apologize if I make anyone pissed off Its all in fun.

I am going to run this topic for the next 2-3 weeks and I want to see what kind of response I get. If nobody is able to get certain ones, I'll give you the answers for it. Maybe in the future, I can do another post like this and give prizes to whoever gets them right.

Without further or due:

Questions:

1. Explain the "time value of money":

2. Name 10 types of cash flow notes:

3. Name 4 ways of FINDING notes:

4. What factors effect how much of a discount a investor offers for a note?

5. Money today is worth more then money in the future: True or False?

6. What is the "usury law?"


Financial Calculator Trivia:

1. A seller has a cash flow note for $250,000 (PV) that is amortized for 20 years (240 months) at an annual interest rate of 9.5% --- with NO balloon payment (no FV.) What will the MONTHLY PAYMENT BE?

• a. $2,585.74
• b, $1,436.26
• c. $4,553.49
• d. $2,330.33

2. You are offered a note amortized for 30 years (360 months) at an annual interest rate of 11% and a PV of $64,000.00 --- no FV (since it doesn't have a balloon payment) and $609.50 (monthly payments.) You decide to buy it with a 20% yield (you pay $36,474.76 for the note.) You know you can sell it to Note One for a 16% yield.

How much will Note One pay for the note?

• a. $55,049.20
• b. $45,324.17
• c. $50,000.00
• d. $35,094.05

3. You receive an offer for a note for $500,000 (PV) amortized over 25 years (300 months) and has a 6% annual interest rate. Once again, no balloon payment so the FV (Future Value) is 0. What are the MONTHLY PAYMENTS?

• a. $4,000.00
• b. $2,406.04
• c. $1,709.43
• d. $3,221.51

4. A note offer comes across your desk. It simply states: 180 months (15 years) amotized, $350,000 (PV) value, 0 (FV), $4,898.50 monthly payment? Problem is... you don't know the interest. What is the annual interest?

• a. 15%
• b. 20%
• c. 25%
• d. None of the Above (NOTA)

5. *BONUS QUESTION* You have a note offer for $1.2M ($1,200,000.00 PV) and an interest rate of 12% annually. It also has no FV (no balloon payment) and is designated to be paid off in 40 years. Monthly payments are set at $12,102.00 a month. You decide to purchase the note with a yield of 18% (meaning you paid $806,164.57 for the note.)

You can sell the note to CenturyNotes for a 15% yield rate... what is your profit for this note?

• a. $254,095.39
• b. $159,504.67
• c. $1,302.05
• d. $3,203.98

How did you get your answer (show your calculation.)


GOOD LUCK TO ALL OF YOU AND I AM REALLY LOOKING FORWARD TO SEEING HOW WELL EVERYONE RESPONDS!!!

[jackace]

I only did the financial calculator trivia real quick. My answers are:

D,B,D,A,B

Last answer is 965,669.24 (15% yield) - 806,164.57 (18% yield) = 159,504.67

Haven't done many of those since finance class so I could have punched some numbers into the calculator backwards or something.

[Young Spark]

^^ Not bad... I'll give you some credit... that was impressive to do the financial calculator part. I would give you full credit if you answered the questions... but congragulations on getting the responses right.

Now we need some answers to the questions, then I'll refresh the list for Round 2 (5 rounds)

[jackace]

Sorry the questions require a lot more time and effort. More then I'm willing to put in actually. The financial calculator questions took only a couple min.

Edit- I guess I can answer number 5 quickly. It's true

[Young Spark]

^^ Either way... good job... new one's will be up later today.

[mattonline]

hey was able to do some of them, but others i can't lol, when you give the anwsers can you tell us how you got to them cheers

[jackace]

The financial calculator ones are rather simple if you have learned to use a financial calculator. Just plug the numbers in and hit solve. For the yield ones you just have to change the interest rate to your desired yield and erase the PV and solve for PV. The last one you have to change the yield twice then subtract.

[Young Spark]

^^ Damn you are smart

But Jackace is right... you need to know the financial calculator to do them... I knew it would be easy for those who knew the financial calculator... but the one's that I def. knew may stump people is answering every single question correctly

So yes, Jackace got them right...

[jasaunders]

1. Explain the "time value of money":
Time value of money is that the value of a dollar changes with time due to interest. It is expected that a dollar today is worth more than that same dollar tomorrow. There are four time values calculatable; present value of a single sum, present value of an annuity, future value of a single sum and the future value of an annuity.

2. Name 10 types of cash flow notes:
I am not sure what you mean by types. For example, a mortgage note and a note for lottery winnings are essentially the same thing, a promisory note to pay a certain amount of money with interest in installments. However, things like A/R probably wouldn't fall under that.

3. Name 4 ways of FINDING notes:
No Clue.

4. What factors effect how much of a discount a investor offers for a note?
As with bonds, notes would be sold at a discount or premium based on market rates. If market rates have increased (market rate > face rate), the note would be sold at a discount. On the other hand, if market rates have declined, the notes would be sold at a premium. There are many other factors that could also have an influence, but would depend on the type of note. For instance with factoring, the greatest influence on the rate is whether it is sold with or without recourse.

5. Money today is worth more then money in the future: True or False?
True, if it's the same amount. $1 today is worth more than $1 in the future.

6. What is the "usury law?"
State caps on the maximum interest rate that can be charged, used to prevent loan sharking.

[Young Spark]

^^ Not bad Josh, but 3 of them were wrong

2. Name 10 types of cash flow notes:
I am not sure what you mean by types. For example, a mortgage note and a note for lottery winnings are essentially the same thing, a promisory note to pay a certain amount of money with interest in installments. However, things like A/R probably wouldn't fall under that.

Wrong: Even though they may all seem like the same thing, in reality they aren't. Each one belongs to a seperate industry. In the cash flow business, these notes have their own seperate "standards." In short, there is no "one for all" question sheet when I ask for information to report to a investor for a potential sale, each note question sheet has different questions that weigh whether a note is sellable or not.

In a sense, you can say they all have the same PURPOSE (not sure if I made sense in my explanation, sorry if I didn't.)

3. Name 4 ways of FINDING notes:
No Clue.

I think this will one will sort of be a challenge so its cool.

4. What factors effect how much of a discount a investor offers for a note?
As with bonds, notes would be sold at a discount or premium based on market rates. If market rates have increased (market rate > face rate), the note would be sold at a discount. On the other hand, if market rates have declined, the notes would be sold at a premium. There are many other factors that could also have an influence, but would depend on the type of note. For instance with factoring, the greatest influence on the rate is whether it is sold with or without recourse.

Semi-Wrong: In the cash flow business (and I understand I am about to give the answer away) --- 2 factors determine whether a note has "sell potential." They are simply: 1, The payor's credit report and 2, the LTV (or Loan-to-Value) --- they are the primary, other things that would determine is note seasoning, position of the note, with or without recourse, etc. Whether its sold with or without recourse is NOT the greatest influence.

[jasaunders]

2. A note payable is simply a note payable. When you ask for types, that question is ambiguous. There is no difference between a note payable for the purchase of a hockey stick and a note payable for the purchase of a watermelon. To say they are different types because one involves the sporting goods industry and one involves the food industry doesn't make any sense, they are both notes payable.

4. The sale prices of any note is going to depend on market rates for other similiar investments. If other similiar notes have a higher interest rate than your current note, then your note will sell at a discount. If interest rates have dropped on other notes, than your note is going to sell at a premium.
Your question was not, what determines if a note has sell potential. Your question was, how are the prices set for notes that are being sold. As with all debt investments, market rates determine this.

Factoring is a whole different beast, and is more of an account payable, short-term investment, rather than a note payable. There are numerous factors that affect the discount rate you get, so I will ignore this one.

[Young Spark]

2. A note payable is simply a note payable. When you ask for types, that question is ambiguous. There is no difference between a note payable for the purchase of a hockey stick and a note payable for the purchase of a watermelon. To say they are different types because one involves the sporting goods industry and one involves the food industry doesn't make any sense, they are both notes payable.

I get your point but thats not how it goes in the real estate industry though. Sure, a note is a note, but if you present a note to an investor, you not defining what kind of note you have. If you go to an investor and say "hey, I have a potential note for sale" --- they're going to ask you the same question over and over everytime you say it. they'll ask "well, what kind of note?" If you can't define that note or tell them what kind of note is, then technically your wasting their time.

So notes ARE different... no one note is the same. You can't have a "mortgage" note and call it a "lottery winnings" note... that's out of the question.

4. The sale prices of any note is going to depend on market rates for other similiar investments. If other similiar notes have a higher interest rate than your current note, then your note will sell at a discount. If interest rates have dropped on other notes, than your note is going to sell at a premium.
Your question was not, what determines if a note has sell potential. Your question was, how are the prices set for notes that are being sold. As with all debt investments, market rates determine this.

You mis-understood the question: allow me to repeat it:

4. What factors effect how much of a discount a investor offers for a note?

If a investor gets a possible note to purchase, they want to see a low LTV and a good credit score of the payor. They won't care about the interest rate in any way because in the end they are getting a "higher" investment from the "discount" they pay for the note.

When someone makes a mortgage note, usually the seller and buyer agree to their OWN interest rate, they don't get assigned the current mortgage interest rate. If a buyer has not so good credit, a so-so down payment but agree's to pay a higher interest for the seller-financing, most likely the seller and buyer would agree upon the higher interest.

When it comes to mortgage notes that's how it works... I've ran across a few for as low as 4% interest rates to one that the 2 parties agree'd to 18% interest rate... so its not based on the mortgage interest rate conditions... MAYBE the real estate market itself will effect the home's value, yes, but saying that "market rates" would in a way (to me) imply your talking about mortgage interest rates... which the interest rates doesn't effect whether a note has "sell potential" or not.

If a home is worth $250,000 and there is a first position senior lien on it (the owner financed note) of $200,000 --- that's a 80% LTV ... assuming its a residential property, and its not above 80% LTV... a investor would be interested in this not but would probably give it a deeper discount... same with credit score.

So in short: the investor looks at 2 main things: credit score of the payor and the LTV (and in many other cases... they want to see a good down payment as well.) These 3 things will usually determine how much of a discount they'll give.

Your question was, how are the prices set for notes that are being sold.

The question was "what factors effect the discount of a note?" In lehman's terms... what usually defines how much of a discount a note gets... I am not getting how market rates has anything to do with a investor purchasing a "private mortgage."