In: Finance
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.
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