trium
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Post by trium on Jan 29, 2019 1:01:10 GMT
Can anyone suggest a reason why effective rates shown against loan parts listed on the SM are frequently significantly different from rates calculated from FS's published formula and this sometimes leads to buyers being directed away from the optimal loan part and towards a sub-optimal. For example, I was looking at Y*rk Pl*ce, B*th Tranche 4 (1639934703) earlier. The top loan part in the list is offered at 0.7% discount and is said to be 14.82% effective (this will have changed slightly by now as it's gone midnight) but I make it only 12.74% based on 84 days accrued interest to settle. The next loan is at 0.6% and is said to offer 14.64% (I make it 14.14%). Since it has only been active for 70 days it has accrued less interest and is therefore CHEAPER TO BUY (£25.47 for a £25 part) than the top loan (£25.58) despite the lower discount. I appreciate that small variations in effective rates are caused by rounding but that is not the case here. It cannot possibly be better to buy a more expensive loan part, nor can it possibly have a higher effective rate so something is not right. It's not the first time I've seen this so now if I'm buying on the SM I do my own sums and choose the cheapest overall, not necessarily the first listed nor even the highest discount. |
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adrian77
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Post by adrian77 on Jan 29, 2019 10:19:35 GMT
Very good question - my calculations caused me to reach the same conclusion
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bg
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Post by bg on Jan 29, 2019 10:43:45 GMT
I think the calculations are right.
Perhaps you guys could share your calculations for this example?
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Doc
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Post by Doc on Jan 29, 2019 10:58:29 GMT
Very good question - my calculations caused me to reach the same conclusion I couldn't resist answering this one, especially as two posters reached the same conclusion. 
'For example, I was looking at Y*rk Pl*ce, B*th Tranche 4 (1639934703) earlier. The top loan part in the list is offered at 0.7% discount and is said to be 14.82% effective (this will have changed slightly by now as it's gone midnight) but I make it only 12.74% based on 84 days accrued interest to settle.
The base interest rate is 13%, so buying the loan at a discount would never make it lower than 13% - (12.74% ?) - the calculation is explained in the price breakdown section once you click on the loan before you click purchase.
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Post by mrclondon on Jan 29, 2019 11:44:11 GMT
Y*rk Pl*ce, B*th Tranche 4 (1639934703) 116 days remaining 13% yield
£200.00 Active 85 days -0.70% Discount 14.86% Effective rate £204.65 price to pay incl int & discount
Calc interest accrued = 200 * 0.13 * 85 /365 = £6.05 Calc interest to accrue = 200 * 0.13 * 116 /365 = £8.26
Non-taxpayer / IFISA
Calc maturity yield = (6.05 + 8.26 - 4.65 ) / 204.65 / 116 * 365 = 14.85%
20% Tax Payer
Calc inherited tax liability = 6.05 * 0.2 = £1.21
Calc maturity yield = (6.05 + 8.26 - 4.65 - 1.21) / 204.65 / 116 * 365 = 12.99%
40% Tax Payer
Calc inherited tax liability = 6.05 * 0.4 = £2.42
Calc maturity yield = (6.05 + 8.26 - 4.65 - 2.42) / 204.65 / 116 * 365 = 11.1%
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£200.00 Active 71 days -0.60% Discount 14.61% Effective rate £203.86 price to pay incl int & discount
Calc interest accrued = 200 * 0.13 * 71 /365 = £5.06
Calc interest to accrue = 200 * 0.13 * 116 /365 = £8.26
Non-taxpayer / IFISA
Calc maturity yield = (5.06 + 8.26 - 3.86 ) / 203.86 / 116 * 365 = 14.6%
20% Tax Payer
Calc inherited tax liability = 5.06 * 0.2 = £1.01
Calc maturity yield = (5.06 + 8.26 - 3.86 - 1.01) / 203.86 / 116 * 365 = 13.04%
40% Tax Payer
Calc inherited tax liability = 5.06 * 0.4 = £2.02
Calc maturity yield = (5.06 + 8.26 - 3.86 - 2.02) / 203.86 / 116 * 365 = 11.5%
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Conclusion
For a non-taxpayer / IFISA the first part has a higher maturity yield, but for a 20% or 40% tax payer the second part with a lower discount but lower days active has a marginally higher maturity yield once the inherited tax liability has been taken into account.
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trium
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Post by trium on Jan 29, 2019 20:47:36 GMT
I think the calculations are right. Perhaps you guys could share your calculations for this example? I was using the calculation published by FS near the bottom of the page I linked to but I was assuming that the maturity value of, for example, £200 @ 13% is £206.50. Some of the Y*rk Place parts will have gone well over 183 days by maturity so the value is higher - mrclondon's workings take this into account. contrarian is of course correct and I should have spotted that. Anyway, it's all clearer now. Thanks guys 
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