How to make paper discounts
I am repeatedly asked how to discount paper. Many people think of it as a magical system used to discount an IOU or mortgage to a specific yield, but it’s actually quite simple with the right tools. Below I will show you step by step how to discount a bill using either the HP-12C or the Texas Instruments Business Analyst II Plus or BA II Plus.
Generally speaking, you should start by entering the terms of the existing loan into your calculator. For this example we will use a loan or note with a beginning balance of $100,000, payable monthly at 6% interest and fully amortized over 30 years. Once this is in our calculator, we solve for the payment. Now suppose we want to discount this loan to get a 10% return. Since the loan already exists, we cannot change the terms of the loan, but we can change what we would pay for this loan to achieve our 10% return. With the above information already in our financial calculator, we change the interest rate to 10% and solve for PV or present value.
Using the BA II Plus the keystrokes would be as follows:
1. Clear the financial records with the second beige key and then press the CLR TVM beige key. I usually repeat this process by pressing the second key and pressing CLR WORK as well and some even add the second key followed by the RESET key.
2. Next, enter the terms of the previous existing loan: 6 I/Y, 100,000 PV, 360 N and settle the payment by pressing the CPT key followed by the PMT key. The calculator should read -599.55. The number is negative because the calculator tells us that it is an OUTGOING payment versus an incoming payment which would be positive.
3. Next, we enter our new 10% yield into the calculator by entering 10 into the calculator and then pressing I/Y to set the new annual interest rate to 10%.
4. Then we press CPT and PV to calculate the new current value and we get 68,319.27. This means that if you needed a 10% return on funds invested in the note described above, you would pay $68,319.27 for it. The difference between $100,000 and $68,319.27 is $31,680.73, which is the amount of the discount. This is a discount of about 32% ($31,680.73 divided by $100,000.00 = 0.3168 or rounded to 0.32 or 32%).
Now if the note above had been seasoned for 3 years or 36 months, when we were changing the interest or I/Y from 6 to 10, we would also change the N from 360 to 324 which is 360 – 36. So we would solve for PV like we did above and get $67,056.46 as our discounted price.
If you’re working with interest-only payments, enter the N as 99999. Working with balloon payments is a little more complicated, so contact us and we’ll discount that as a free service.
Data entry on the 12C is a bit different than the BA II Plus. To multiply 3 times 6 on the BA II, you would enter the numbers as you would say them; 3, X, 6, = and you would get 18. In the 12C you would enter 3, enter key, 6 and then X for times and you would get your answer of 18.
To run the same discount on the 12C, we would re-enter the terms of the note or loan as it currently exists. We would clear it by pressing the beige f key and then the CLX key to clear the financial records.
Then go as follows:
1. 100000, PV, 360 N, 6 blue keys g I, PMT and we would get the same payout as above of -599.55. Again, negative numbers are sums out and positive numbers are sums in.
2. Then enter the new interest rate 10, blue g, I, PV to get the discounted present value.
3. Interest only calculations can be achieved by entering 99999 in the N
4. As with the BA II Plus, balloon payments are a little more complicated, but if you contact us, we’ll be happy to discount your balloon payment offer free of charge.
Although I have an HP 12C and have used it for years, I prefer the BA II Plus. I used one of the first Business Analyst calculators made by Texas Instruments in the 1980s and loved it. When I finally wore it out, I checked to buy a new one and ended up contacting Texas Instruments directly to order one. I told them I loved the machine and finally wore it out and needed a new one and was ready to buy it and they took my shipping info and sent me a new one totally free. I told them that they didn’t need to do that since the old calculator didn’t owe me anything but they insisted and sent me the new BA II Plus totally FREE. That’s customer service.
I hope you find this useful for discounting paper or notes or loans etc. If we can help you discount or purchase them, please contact me at your convenience.
Thanks for your time,
TJ Stewart, Founder and CEO