### Author Topic: ytm vs. remaining payments  (Read 5363 times)

#### mikedev10

• Newbie
• Posts: 37
##### ytm vs. remaining payments
« on: January 11, 2019, 03:43:00 PM »
sorry for all the peppering of questions in here guys but i'm new so i have plenty.

do you take a loan just looking at absolute ytm or do you try to attempt some annualized rate calculation to decide if you want it?  ie. 10% with 6 months remaining is great, 10% with 59 months remaining is not so great.  i assume ytm / months_remaining is maybe a little too simple and naive a way to calculate something, nonetheless it would factor in those months better - is this advised?

for now i'm doing something more like the ytm can't drift too much from the original rate, ie. a 12% loan i'm looking for a 10% ytm.  maybe that is simpler and easier and does enough of the same thing?

#### lctz

• Newbie
• Posts: 19
##### Re: ytm vs. remaining payments
« Reply #1 on: October 31, 2019, 09:02:15 PM »
remaining payments affect ytm in many ways:
1. liquidity risk, longer remaining payments means your investment is locked longer.  You demand higher yield for compensation (e.g: 1yr CD rate is usually lower than 3yr CD).
2. interest rate risk. usually ignored for consumer credit product because of dominance of credit risk.
3. Default risk.  The biggest part.  A unit default risk (academic name: hazard rate, default risk per month) is different at each age (e.g. higher rate of default in middle age than earlier age.). Using survival analysis, you can compute an empirical survival curve and use this curve to calculate YTM that depends on remaining payments.

#### Fred93

• Hero Member
• Posts: 2231
##### Re: ytm vs. remaining payments
« Reply #2 on: October 31, 2019, 09:38:45 PM »
10% with 6 months remaining is great, 10% with 59 months remaining is not so great.  i assume ytm / months_remaining is maybe a little too simple and naive a way to calculate something, nonetheless it would factor in those months better - is this advised?

No.  They are equally great.  YTM is a number already in annualized units.

#### Rob L

• Hero Member
• Posts: 2119
##### Re: ytm vs. remaining payments
« Reply #3 on: November 01, 2019, 10:33:51 AM »
I think this old thread has some relevance here:

Topic: Interest Rate, Yield to Maturty (YTM) and Service Fees