This is the second in our series of articles on the Basics of Paper and Notes.
In the last post, we defined the term, “Paper.” In this post, we’ll answer the question… What is discounted paper?
Discounted Paper
Almost anyone who buys an income stream will pay less then the face value at the time of purchase. This practice is called discounting.
By discounting the present value of a note, a buyer can raise the yield or return on an investment to match their requirement.
On the other hand, if the note buyer were to pay the full face value of the note, the return is equal only to the interest rate stated within the note.
From the seller’s point of view, it comes down to receiving their money over time as they agreed upon the creation of the note or converting it into cash now. (Think of winning the lottery…)
The trade off for the note holder getting cash now is they must usually accept less than the face value (or remaining balance) on the note. Sometimes the discount is very small and other times it is large.
The determining factors are the terms of the note, the quality of the collateral, the requirements of the buyer and what the seller is willing to accept.
So that’s what discounted paper is. In the next post, we’ll review the Seven Steps Of Note Buying.
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