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

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)

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.

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.

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?

yes

thanks!

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 × 0.008392) = 0.1007 or 10.07%. The capitalization rate is the weighted average of the mortgage constant and the required equity return, or (0.55 × 10.07%) + (0.45 × 14.5%) = 12.06%.” This is different from the way CPK put it The way the TestTrac puts it is: N=25*12=300 , I/Y=9/12 , PV=$1 , FV=0 PMT=0.008392 . So debt Rate is 12*0.008392=0.1007 or 10.07 % No need to add two rates , just a direct single annualized rate

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

the pmt above is (.00089X12)+9 If you try on your calculator it will come up. Its just another crappy answer by cfa

I tried it both ways i.e. $1 = PV , $0 = FV and PMT comes to be 0.008392 then $0 = PV, $1 = FV and PMT comes out to be -0.0008392 ( extra zero) At this point I was losing my mind . Why should it matter if I start with 0 and end with 1 or start with 1 and end with zero? The payments should be same .

It matters because you are paying back $1 notional principle in the future, not now. So it should be FV = $1, not PV = $1

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

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

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

janakisri Wrote: ------------------------------------------------------- > 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 whao! this is splendid, I learnt this cold from the 2 stage, now which ever way I work it, I will score this, I will just take the higher one -:o) Thanks everyone