Market Value of a Loan: Assume that Sarah sold her house and provided seller financing to...

Market Value of a Loan: Assume that Sarah sold her house and provided seller financing to the new buyer. Sarah loaned $300,000 to the buyers at 6% with a 30 year fully amortized loan. Five years later, Sarah decided that she wanted to sell the income stream for a lump sum so that she could buy a new Ferrari instead. If the most willing buyer she could find offered her a price that reflected a 10% rate of return, how much was Sarah offered? Solving with a financial input calculator is fine.

Solutions

Expert Solution

The amount that Sarah was offered = $197,936.62

Firstly we need to compute the monthly payments on the original loan amount

Using financial calculator input

PV = -300000

I/Y = 6/12

N = 30*12 = 360

Solve for PMT = 1,798.65

Next we need to compute the present value of the remaining payments

Using financial calculator input

N = 25*12 = 300

I/Y = 10/12

PMT = 1798.65

Solve for PV as 197,936.62

Hence the amounts that Sarah was offered = $197,936.62

jeff jeffy answered 1 year ago

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