Author Topic: Yield To Maturity - The Most important?  (Read 13587 times)

InvestHawg

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Yield To Maturity - The Most important?
« on: August 04, 2014, 11:21:11 PM »
If my main strategy was to simply buy and hold notes until maturity, wouldnt the "Yield To Maturity" spec be the most important determining factor in my strategy, given that I buy fairly conservative loans.

Im new to FolionFN and I unfortunately cannot buy on the retail site because of my stupid state laws. At any rate, my strategy has been to buy loans that have 12 months or less payments and never late, with atleast 12% YTM. I totally disregard the markup or discount as my strategy is to simply hold and never re-sell. Can I really count on and rely on FolioFN's YTM calculation to be accurate truely give me 12% or higher returns on my investments?

I just dont see how they are calculating this YTM as I look at the asking price and then look at the remaining payments and it never seems to equal the YTM, its usually a way lower percentage than what the stated YTM is. So what am i missing?

yojoakak

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Re: Yield To Maturity - The Most important?
« Reply #1 on: August 05, 2014, 10:23:51 AM »
YTM doesn't account for defaults or accelerated payoffs.

I do a YTM calculation in my greasemonkey script and it almost never matches what LendingClub is calculating.

hoggy1

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Re: Yield To Maturity - The Most important?
« Reply #2 on: August 05, 2014, 06:35:02 PM »
My recommendation is you stop for the moment. I really don't mean to insult you and I have gone to some trouble to help you answer your question. I can tell from your question you do not understand compound interest and discounted revenue streams well enough to be putting your money in this type of investment.  Look at this loan for sale on Folio:
 
https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=7731130&order_id=27161773&note_id=32136061

Now look at the tables below:

Loan IntPrinPaymntIntPaidPrPaidBal
121.70%25.000.950.450.5024.50
20.950.440.5124.00
30.950.430.5223.48
40.950.420.5322.95
50.950.420.5322.42
60.950.410.5421.87
70.950.400.5521.32
80.950.390.5620.76
90.950.380.5720.18YTMPur PricePaymntIntPaidPrPaidBalADJYTMPur PricePaymntIntPaidPrPaidBal
100.950.360.5919.60..17.77%21.000.950.310.6420.36..16.99%21.210.950.300.6520.56
110.950.350.6019.000.950.300.6519.710.950.290.6619.90
120.950.340.6118.390.950.290.6619.050.950.280.6719.23
130.950.330.6217.780.950.280.6718.390.950.270.6818.56
140.950.320.6317.150.950.270.6817.710.950.260.6917.87
150.950.310.6416.510.950.260.6917.020.950.250.7017.17
160.950.300.6515.860.950.250.7016.320.950.240.7116.46
170.950.290.6615.190.950.240.7115.610.950.230.7215.75
180.950.270.6814.520.950.230.7214.900.950.220.7315.02
190.950.260.6913.830.950.220.7314.170.950.210.7414.28
200.950.250.7013.130.950.210.7413.430.950.200.7513.54
210.950.240.7112.420.950.200.7512.680.950.190.7612.78
220.950.220.7311.690.950.190.7611.910.950.180.7712.01
230.950.210.7410.950.950.180.7711.140.950.170.7811.23
240.950.200.7510.200.950.160.7910.350.950.160.7910.44
250.950.180.779.440.950.150.809.560.950.150.809.63
260.950.170.788.660.950.140.818.750.950.140.818.82
270.950.160.797.860.950.130.827.930.950.120.838.00
280.950.140.817.060.950.120.837.100.950.110.847.16
290.950.130.826.230.950.110.846.250.950.100.856.31
300.950.110.845.400.950.090.865.390.950.090.865.45
310.950.100.854.540.950.080.874.520.950.080.874.58
320.950.080.873.680.950.070.883.640.950.060.893.69
330.950.070.882.790.950.050.902.740.950.050.902.79
340.950.050.901.890.950.040.911.840.950.040.911.88
350.950.030.920.980.950.030.920.910.950.030.920.96
360.950.020.930.040.950.010.94-0.020.950.010.940.02

You should recognize the leftmost portion of the table with 36 lines as the "Amortization table" for the original loan. The bold data is given and all the rest of the table is computed from those first three items, Interest, loan amount, and installment payment. You should go to the trouble of creating this table for yourself in excel.

Focus now on the middle table. The loan has had 9 payments made with 27 remaining payments. We do exactly as we did for the original amortization table replacing interest with YTM and loan amount with the asking price of the loan for sale. The borrowers payment remains the same. If you notice on line 36 everything ends with a zero balance neglecting small rounding errors of a few cents. So the first level answer to your question is that the stated YTM on Folio is correctly calculated EXCEPT it does not include the 1% they will charge you on the sale. The rightmost set of data indicates that after their service fee (add 1% to the price) the ACTUAL yield to maturity on this revenue stream (assuming THIS borrower makes all payments) is 16.99% which is iteratively determined (guess the answer and watch the ending balance get near to zero).

Notice that while Folio takes 1% the yield is reduced by a lesser amount (about .78%). You will read this if you study the LC site regarding returns and yields.

One other thing that concerns me is your "strategy has been to buy loans that have 12 months or less payments and never late". So you are purchasing loans when they are most likely to default. See http://www.lendacademy.com/forum/index.php?topic=2364.0 and http://blog.lendingrobot.com/)

Hope this helps. Your in the right place. Go to unread post since last visit and read the posts with most replies first and follow the links in them. These are generally important. Participate in the discussions and ask question when you don't understand. These are nice folks and someone almost always answers even the silliest of questions although you might have to grovel now and again. 

Again, I mean no disrespect. If you already knew all this, welcome to the board and happy investing.


« Last Edit: August 05, 2014, 06:57:30 PM by hoggy1 »
Steve

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Re: Yield To Maturity - The Most important?
« Reply #3 on: August 05, 2014, 08:59:46 PM »
The rightmost set of data indicates that after their service fee (add 1% to the price) the ACTUAL yield to maturity on this revenue stream (assuming THIS borrower makes all payments) is 16.99% which is iteratively determined (guess the answer and watch the ending balance get near to zero).

First, beautiful table!  8)

A couple of comments:
  • Doesn't LC charge 1% on the payments received (principal + interest), not just on the remaining principal?
  • The OP may have meant "my strategy has been to buy loans that have 12 months or less payments remaining and never late" which sounds similar to New Jersey Guy's "Penny Notes" strategy for FOLIOfn.

hoggy1

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Re: Yield To Maturity - The Most important?
« Reply #4 on: August 05, 2014, 10:08:02 PM »
Right you are. I forgot LCs 1% cut. I just wanted to demonstrate how these calculations are done, He should be able to incorporate that as homework.
Steve

InvestHawg

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Re: Yield To Maturity - The Most important?
« Reply #5 on: August 05, 2014, 11:10:55 PM »
You are correct, i honestly have no clue about this and I take it as no insult. And brother7 is correct, my strategy is to buy notes that have 12 or less remaining payments, never late. Sorry for the confusion. My thought is, that they have been making payments this long and they only have a few months left on their note, surely they will continue to pay. So their is less of a need to analyze different types of data. Sure I know its unorthodox, but hey, it kinda makes sense eh? Im sure their is probably more of a risk of a early pay off with this strategy, but hey thats better than risk of default.

At any rate. I Still dont understand how the YTM is calculated.
take this note for example:
https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=1417775&order_id=32194277&note_id=12159521
The asking price is 19.40
The total remaining payments should equal up to 20.53 with 12 months of payments left
Stated YTM is 8.85%
I cant figure out where they are getting 8.85%. or maybe I should say I cant figure out how they are getting 20.53

because 19.40 + 8.85% = 21.1169

if i took their number of 20.53, that is really only a YTM of 5.8% because
19.40 + 5.8% = 20.53

whats going on here?





Fred93

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Re: Yield To Maturity - The Most important?
« Reply #6 on: August 06, 2014, 02:24:05 AM »
I Still dont understand how the YTM is calculated.
take this note for example:
https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=1417775&order_id=32194277&note_id=12159521
The asking price is 19.40
The total remaining payments should equal up to 20.53 with 12 months of payments left
Stated YTM is 8.85%
I cant figure out where they are getting 8.85%. or maybe I should say I cant figure out how they are getting 20.53

because 19.40 + 8.85% = 21.1169

Its the time value of money.  Yield-to-maturity is an IRR calculation of the cash flows. 

You get payments each on a different day.  So you can't just take the initial amount and multply it by 1.0885 .  That would be correct if the entire amount was paid to you exactly one year from the time you made the investment.  Chunks of that money come back to you on 12 different dates.  Almost all of it comes to you sooner than 1 year.  Sooner means higher YTM.  The fact that you get some of the money back sooner allows you to reinvest.

YTM is a calculation that correctly weights each of those payments, and the time it is (or is supposed to be) made.   In finance textbook terminology, it is the discount rate that discounts the future cash flows (the 12 payments) so that their net present value equals what you paid for the thing.

hoggy1

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Re: Yield To Maturity - The Most important?
« Reply #7 on: August 06, 2014, 08:57:09 AM »
...my strategy is to buy notes that have 12 or less remaining payments, never late.

Good

My thought is, that they have been making payments this long and they only have a few months left on their note, surely they will continue to pay.

The DATA tells us the PROBABILITY of default is reduced in this period

So their is less of a need to analyze different types of data.

Bad assumption

Im sure their is probably more of a risk of a early pay off with this strategy, but hey thats better than risk of default.

Not always the case. See https://www.peercube.com/blog/post/19
Prepayment in the first or second month of AFTER PURCHASE can result in a net loss because of fees

At any rate. I Still dont understand how the YTM is calculated.
...
The total remaining payments should equal up to 20.53 with 12 months of payments left
Stated YTM is 8.85%
I cant figure out where they are getting 8.85%. or maybe I should say I cant figure out how they are getting 20.53

because 19.40 + 8.85% = 21.1169

You CAN NOT DO THIS. You carefully chose a note with 12 payments remaining so that you thought you would not need to concern yourself with monthly calculations and could just use the APR (ANNUALIZED % RATE). NOT TRUE. There are 12 payments of $1.71 left which is where the $20.53 came from (REMEMBER NOTHING HAS CHANGED FOR THE BORROWER).
The APR of 8.85% is never used directly as you are trying to do. You must use the monthly interest rate of 8.85/12 = 0.7375%/month

As I said originally, you have to be able to create the table below (where you will see the balance goes to zero after 12 months) or you will never understand this stuff.

YTMPur PricePaymntIntPaidPrPaidBal
18.85%19.401.710.141.5717.83
21.710.131.5816.25
31.710.121.5914.66
41.710.111.6013.06
51.710.101.6111.45
61.710.081.639.82
71.710.071.648.19
81.710.061.656.54
91.710.051.664.87
101.710.041.673.20
111.710.021.691.51
121.710.011.70-0.18


Steve

hoggy1

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Re: Yield To Maturity - The Most important?
« Reply #8 on: August 06, 2014, 09:06:40 AM »
Correction to my first post: Folio charges the seller 1% of the asking price, not the purchaser.
Steve

AnilG

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Re: Yield To Maturity - The Most important?
« Reply #9 on: August 06, 2014, 01:14:33 PM »
Based on my quick analysis, I believe you have a good strategy on your hand. Though still very preliminary, I believe you may benefit by replacing 12 month or less payments criteria with remaining principal less than 30% of amount lent. Also, you may need to avoid borrowers with accelerated payments in the past as they are likely to pay-off quickly after you purchase notes. As for YTM, I most probably will target a value of at least 2-3x of your targeted expected yield. Too large of YTM (something fishy) or too small of YTM (not enough coverage to overcome lemons) may not be good.

You may want to investigate past performance little bit more to see which credit grade loans tend to payoff early or default during your holding period and avoid them. I agree that you don't need to give too much consideration to loan and borrower data at the time of loan issue. No need to understand credit data.

Your strategy is pretty simple and most probably effective.

If my main strategy was to simply buy and hold notes until maturity, wouldnt the "Yield To Maturity" spec be the most important determining factor in my strategy, given that I buy fairly conservative loans.

Im new to FolionFN and I unfortunately cannot buy on the retail site because of my stupid state laws. At any rate, my strategy has been to buy loans that have 12 months or less payments and never late, with atleast 12% YTM. I totally disregard the markup or discount as my strategy is to simply hold and never re-sell. Can I really count on and rely on FolioFN's YTM calculation to be accurate truely give me 12% or higher returns on my investments?

I just dont see how they are calculating this YTM as I look at the asking price and then look at the remaining payments and it never seems to equal the YTM, its usually a way lower percentage than what the stated YTM is. So what am i missing?
---
Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com

InvestHawg

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Re: Yield To Maturity - The Most important?
« Reply #10 on: August 06, 2014, 11:20:42 PM »
Ok Ok, I think I am getting it a little. What is the formula you are using in excel to get that table?

But lets face it, my previous post is somewhat true if I am only concerned of what I make on my initial investment. I incorrectly assumed I was going to make 8.85% return on Investment, but the 8.85% that folioFN is not really a return on investment calculation apparently. ROI does not equal yield to maturity, correct? The fact is, im only making a 5.8% return on investment which kinda aint that great eh?

Ultimately, all we really care about is how much money we make in the end right? So figuratively speaking, if u take 2 people and one invests money in the stock market and another invests the same amount of money in notes on FolioFN and/or Lending Club, and after a year they both loosely said they made 12% "return", the person in the stock probably made more money right? 

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Re: Yield To Maturity - The Most important?
« Reply #11 on: August 06, 2014, 11:36:34 PM »
What is the formula you are using in excel to get that table?
YIELD()? https://support.google.com/docs/answer/3093255
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

hoggy1

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Re: Yield To Maturity - The Most important?
« Reply #12 on: August 07, 2014, 08:14:40 AM »
I incorrectly assumed I was going to make 8.85% return on Investment, but the 8.85% that folioFN is not really a return on investment calculation apparently. ROI does not equal yield to maturity, correct? The fact is, im only making a 5.8% return on investment which kinda aint that great eh? ROI does not equal yield to maturity, correct?

You're not trying! ROI does equal YTM, its just not the simple multiplicative relationship you want it to be. You need to google and read about amortization. As Fred93 tried to explain to you, part of your initial investment is returned each month. The return on the money that remains outstanding is 8.85% as demonstrated by the "amortization schedule" included in my last post.

The "formula" you already know, you just refuse to look at it on a monthly basis.
A. The PAYMENT is always the same and given 1.71
B. The initial BALANCE is the purchase price 19.40
C. MONTHLY INTEREST  is the annualized interest / 12 =  8.85/12 = 0.7375%
D. INTEREST OWED is always the BALANCE * MONTHLY INTEREST (1st month is 19.40 * .7375 / 100  = $0.143 )
E. The remainder of the PAYMENT is  PRINCIPLE REPAYMENT = PAYMENT - INTEREST OWED (1st month is 1.71 - 0.143 = 1.5654)
F. The BALANCE after a payment is the previous BALANCE - PRINCIPLE REPAYMENT

Repeat D, E, F for number of payment remaining till balance reaches zero.

« Last Edit: August 07, 2014, 01:57:32 PM by hoggy1 »
Steve

Rob L

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Re: Yield To Maturity - The Most important?
« Reply #13 on: August 07, 2014, 08:21:24 AM »
You can use an on-line amortization calculator to play around with the basics. Very easy and convenient.
I like http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx.
It's for home mortgages, but works for P2P loans just as well (except for service fees).
As an example run the three table columns above to verify you're getting the right answers.

hoggy1

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Re: Yield To Maturity - The Most important?
« Reply #14 on: August 07, 2014, 01:55:19 PM »
My apologies to InvestHawg and others if I have spoken condescendingly in any of my responses above. I received a very nice PM from another board member suggesting in part that I
Quote
  consider backing off from the "professor and the stupid math student" and just help all of us rather than making us feel stupid
I am really trying to help the questioner to understand a complicated topic with the simplest method I know: generating the amortization tables.
I forget others are reading as well.
Steve