Discounting Promissory Notes – What Causes the Discount?

Lessons I’ve Learn about Discounts

Promissory Note Investing Benefits.
Promissory notes are valuable investing tools; and, they are also miss-understood tools. Understanding them and their valuation characteristics are hard to forgive because they are not publicly traded on an exchange, or publicly advertised like real estate. They are not discussed or covered by the press.

Their benefits lie in the fact that they can provide both short-term and long-term income above the rates normally available from bank and the stock market. As is the case with all investments, with the benefits come disadvantages; you can not get one without the other. Probably the major disadvantage of promissory notes is their selling price is usually deducted from the unpaid principal balance owed when sold. But, if they are held to maturity, they usually repay the invested amount in full. They are not good investments use for buy and sell / in and out transactions.

Are Promissory Notes Usually Discounted?
Usually, when a promissory note is sold before its matured, the price received is less than the unpaid balance. In fact, about 80% of all private promissory notes are sold for less than the unpaid balance. These same notes, if held to maturity, have a high probability of repayment in full. They are just not good for buy and sell transactions.

Reasons that Cause Discounting.
There are numerous reasons for discounting a note. Listed below are the most common defects that result in discounts; these are not all of the reasons, but, they are the main ones:

There is no promissory note market place-transactions are private-one at a time.
Each note must be individually appraised and valued – usually by an expert in the field.
Each promissory note is unique, has its own terms, conditions and wording.
The note’s interest rate may be too low compared to market rates.
The terms and conditions of the note and loan documents…

Source by Lawrence Tepper

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Discounting Promissory Notes – What Causes the Discount? published first on http://www.noteseminars.com/
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