Present Value

Present value (PV) is what a future sum of money — or a stream of future payments — is worth in today's dollars. It rests on the time value of money: a dollar received next year is worth less than a dollar in hand today, because today's dollar can be invested and grow. Present value is the single most important concept in note pricing, because the price a note buyer offers is, fundamentally, the present value of your note's remaining payments at the buyer's required yield.

Why future payments are discounted

Your note promises a series of monthly payments stretching years into the future, possibly ending with a balloon. Those payments are real, but they are not worth their full sum today because:

• Time: money tied up for years cannot be used elsewhere.
• Risk: the borrower might pay late, refinance, or default.
• Opportunity cost: the buyer could earn a return on that money elsewhere.

To account for all three, the buyer discounts each future payment back to today using a discount rate. The further out a payment is, the more it is discounted — which is why distant payments (and far-off balloons) contribute less to the price than near-term payments.

The present-value formula for a note

For a level-payment note, the present value of the payment stream is:

PV = pmt × (1 − (1 + i)^−n) ÷ i + balloon ÷ (1 + i)^n

where pmt is the monthly payment, i is the monthly discount rate (annual yield ÷ 12), n is the number of payments remaining, and balloon is any lump sum at maturity. That PV is the foundation of the offer. Our note value calculator runs exactly this math across a range of yields to show an estimated offer range.

A concrete example

A note with a $1,000 monthly payment and 120 payments remaining (no balloon):

• At a 9% annual yield, the present value is roughly $79,000.
• At a 12% annual yield, the present value drops to about $70,000.

Same payments, different price — because a higher required yield discounts the future stream more heavily. This is precisely why reducing a buyer's risk (and therefore the yield they require) raises your offer.

Present value vs. face value

The note's face value (principal owed) is not its present value. Present value reflects the timing and risk of the actual payments, which is why notes sell at a discount to face value. The gap between them is the discount the buyer needs to hit their yield.

What it means when you sell

Everything that makes your payments larger, sooner, or safer raises their present value — a higher note rate, a shorter remaining term, strong seasoning, low LTV, and first-lien position. A partial sale of just your near-term payments captures the highest-present-value portion of the note while letting you keep the back end. Understanding present value lets you see, concretely, what drives the number on your offer.