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Note Purchase Yield On Cost Calculator
Discount-to-face note purchases generate yield above face coupon rate.
Yield on cost
0.14%
Annual coupon
$700,000
Annual discount accretion
$400,000
How the math works
Coupon = face × rate. Accretion = (face − purchase) ÷ years. YoC = (coupon + accretion) ÷ purchase.
$10M × 7% = $700k coupon + $2M/5 = $400k accretion = $1.1M ÷ $8M = 13.75% yield on cost.
How to Use
- Enter face value.
- Enter purchase price.
- Enter coupon rate %.
- Enter years to maturity.
- Read yield on cost.
Frequently Asked Questions
Why buy notes at a discount?
Secondary note market sells distressed or illiquid loans below face value. Reasons: (1) lender wants to free balance sheet capacity, (2) note is non-performing and lender values certainty over maximum recovery, (3) lender needs quick exit for regulatory or strategic reason. Buyers earn yield above coupon: a $10M note with 7% coupon bought at $8M (80% of face) earns 8.75% yield from coupon alone, plus $2M principal uplift if held to maturity.
What's yield on cost?
YoC = (coupon $ + prorated gain on discount) ÷ purchase price. For a 5-year $10M note with 7% coupon bought at $8M: annual coupon $700k, annual discount accretion $400k ($2M / 5 years), total annual yield $1.1M on $8M cost = 13.75% YoC. This is simplified; in reality timing and default risk matter. IRR calculation is more rigorous — yields typically 12-25% on performing-discount and 20-40% on distressed with workout.
Risks?
Default: borrower may stop paying at any time. Modification: borrower may negotiate rate reduction or term extension. Pre-payment: some notes pay off early at face, reducing yield. Origination fraud: note terms may not match documentation. Enforcement cost: pursuing non-paying borrower has legal cost. Specialist debt funds evaluate before buying; amateur investors often overlook. Experience and legal due diligence essential.
Who buys discount notes?
Distressed debt funds (Oaktree, Cerberus, Apollo). Private credit and debt funds (Blackstone, Bain, BlackRock). Banks (buying competitor notes during bank failures). Opportunistic real estate funds. Family offices with real estate expertise. Individual investors rarely — requires scale and expertise. Institutional investors allocate 2-10% of portfolio to discount debt during market dislocations, targeting 15-25% returns.
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