band of investment investment, correct, capital, understand

svgleeson

Can someone provide me with the correct way to find the x to the below?

I understand that finding the cost of capital through the band of investment is effectively equal to a WACC for real estate investments. However, the cost of debt is typically calculated as yield + % yield for amortization.

How do I calculate the % yield for amortization portion on my hp12c given assumptions about the loan?

Thanks all

Eric

mp3bu

The factor amounts to a sinking fund contribution paid to the lender (I think). At any rate, the formula is ROI = D/V * (rd + factor) + E/V * re

where factor = i / ( [1+i]^n - 1)

Newhuman

FV=-1
I/Y=Int Rate/12
N=Time period in Months

Find PMT

That is the rate per month

Now that * 12 + the Int rate = Band of investment Mortgage rate

now do a WACC Calculation:
with % of equity investment and the above as the % of the Bond investment.

e.g. 20 year mortgage paying 6%, 35% debt financed, 65% equity financed at 12%

N=240, FV=-1, I/Y=6/12=0.5,
PMT=?

PMT=0.002164

PMT*12 = 0.02597 = 2.6%
total debt rate = 6+2.6 = 8.6%

0.35*8.6 + 0.65 * 12 = 10.8% --> Band of Investment rate.

CP

maryli

The sinking fund factor can be more easily put in memory by thinking of it as a "return of capital". The banks will charge you x% on your outstanding principal, but they also want their money back.

The calculation which CPK just killed (as always) includes a return of $1 notional principal at the end of the loan.

onelife1

cpk123 Wrote:
-------------------------------------------------------
> FV=-1
> I/Y=Int Rate/12
> N=Time period in Months
>
> Find PMT
>
> That is the rate per month
>
> Now that * 12 + the Int rate = Band of investment
> Mortgage rate
>
> now do a WACC Calculation:
> with % of equity investment and the above as the %
> of the Bond investment.
>
> e.g. 20 year mortgage paying 6%, 35% debt
> financed, 65% equity financed at 12%
>
> N=240, FV=-1, I/Y=6/12=0.5,
> PMT=?
>
> PMT=0.002164
>
> PMT*12 = 0.02597 = 2.6%
> total debt rate = 6+2.6 = 8.6%
>
> 0.35*8.6 + 0.65 * 12 = 10.8% --> Band of
> Investment rate.

cpk - if the loan makes annual payments, we do not have divide the I/Y by 12 and the N should be keyed in as the number of years correct?

needhelp1700

From the Sample Exam :

"in order to calculate the capitalization rate using the band-of-investment method, one must first determine the mortgage constant, which can be found by first calculating the monthly annuity payment on $1 principal for the mortgage rate and term (300 payments, $1 present value, 9% / 12 monthly rate implies a monthly payment of 0.008392) and multiplying by 12 (12

benbenxiong

That's not how the CFAI text taught it. Refer to Book 4 Pg 35. CPK seems right

Rasec

thats awesome, i always struggled putting 0 or 1 in, now it doesn't matter.

cv4cfa

while we're on this,

EAA where do we put NPV, FV or PV, i always get this mixed up

wilslm

I think the difference is , if you do it the first way i.e. PV=$1 , you don't need to add anything.

For example if the original mortgage rate is 9% , then I/Y=9/12 and N=300.

If you do it with PV=$1 and FV=0 , then you get the annualized rate straightaway out of your calculator as 0.008392*12 = 10.07

If you do it the way CPK suggests , with PV=$0 , then you get it is two steps:

First 0.0008917 * 12 = .0107
The 0.09+0.0107 = 10.07

So CFAI way ( i.e. TestTrac solution way ) is one step , while the other is two steps