alanp
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Post by alanp on Dec 4, 2015 16:06:05 GMT
Ahh. If I had read your previous post correctly I would have seen that you said it was correct there.
Thanks
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ablender
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Post by ablender on Dec 4, 2015 20:41:01 GMT
Can someone please help me with this one. I am looking at a loan having an interest of 11% with a maturity date in October 2018 (S**E** E2W Equip). There are parts selling on SM at 99%. I was expecting these to have a yield of not less than 11% but they are showing a yield of 9.134%. Why? It's a known problem. The AER is correct because the "discount" is relative to the original capital value of the loan, not the reduced current capital value (it's an amortising loan) Stevet, may I trouble you for a simple example with numbers? (Something that explains amortising as well.) Cheers.
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james
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Post by james on Dec 4, 2015 20:44:41 GMT
Amortising just means like a standard repayment mortgage or personal loan. Each month's payment is part capital and part interest and as the capital is gradually repaid the amount that is interest drops each month because it's being paid on less outstanding capital.
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SteveT
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Post by SteveT on Dec 4, 2015 20:52:02 GMT
Imagine if the original loan was £100 and it's made two £1 capital repayments (plus interest), so £98 capital remaining. You'd expect a 1% discount to be charging you 99% of £98, so £97.02. But currently the Ablrate SM is applying it as 99% of £100. So you'd be paying £99 for £98 of capital, effectively a 1% premium approx. That's why the AER is LESS than the monthly interest rate.
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mikeh
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Post by mikeh on Dec 4, 2015 20:57:29 GMT
I think I may have stumbled upon the problem with amortising loans in the secondary market here. I found this paragraph in AblRate's FAQ section:
Has anyone ever come across a loan that worked like this? Accrued capital is a concept I don't understand. I can confirm that this is indeed what the software is doing but I think it leaves the buyer out of pocket and the seller with a windfall.
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Post by ablrateandy on Dec 4, 2015 21:13:32 GMT
Yes. That is the root of where it is wrong. At the moment it is wrongly taking into account accruing capital and ignoring paid capital.
Mea culpa. We are on the case. (The AERs remain correct).
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ablender
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Post by ablender on Dec 4, 2015 21:14:47 GMT
Thanks Stevet. That makes things clear.
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james
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Post by james on Dec 4, 2015 21:33:59 GMT
Imagine if the original loan was £100 and it's made two £1 capital repayments (plus interest), so £98 capital remaining. You'd expect a 1% discount to be charging you 99% of £98, so £97.02. But currently the Ablrate SM is applying it as 99% of £100. So you'd be paying £99 for £98 of capital, effectively a 1% premium approx. That's why the AER is LESS than the monthly interest rate. And of course that explains why there are offers at 99%. Lets pretend that the 13 December payment has been made and that it has the same capital and interest split as the first payment. The capital payment was £2.41 per £100 outstanding. So two of those would cut the capital value to £100 - 2 x £2.41 = £95.18. It's actually less than that because the second capital payment is really higher. A 99% pricing means that £99 would be paid for the £95.18 of capital. That's actually a premium at 99 / 95.18 * 100 = 104.01%. This is changing daily and we're actually just before the payment is due so it'll probably be a little higher than 4% premium at the moment because of my same capital payment approximation. To protect sellers Ablrate will need to do something like cancelling all offers as the fix is applied, because their prices will suddenly drop. Or alternatively giving email notice to each seller a day or two in advance and blocking new offers, but using the existing suspended loan mechanism is probably the easy way to go. Buyers see the AER so they hopefully do have a good idea of the return they are going to get. Sellers don't because what maters to the seller is the capital they get. Of course this doesn't mean that buyers are getting a bad deal. The AERs aren't unreasonable and hopefully that is the main determining factor for a buyer.
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Post by ablrateandy on Dec 4, 2015 21:42:23 GMT
Yes and thanks to all. We haven't suspended it because we feel that the AER is clearly marked and the error, whilst irritating, is not causing any major harm or loss. The people who are "at risk" are people who leave bids up for a long time and forget about them because the AER on a fixed price bid is falling daily. We have flagged it a couple of times and I will re-flag on my next update e-mail . If I thought it was "unfair" I would suspend straight away... .
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mikeh
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Post by mikeh on Dec 4, 2015 21:48:13 GMT
Yes and thanks to all. We haven't suspended it because we feel that the AER is clearly marked and the error, whilst irritating, is not causing any major harm or loss. The people who are "at risk" are people who leave bids up for a long time and forget about them because the AER on a fixed price bid is falling daily. We have flagged it a couple of times and I will re-flag on my next update e-mail . If I thought it was "unfair" I would suspend straight away... . The loans are being traded at the wrong price. Doesn't sound very fair to me. How can the AERs be correct?
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james
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Post by james on Dec 4, 2015 21:53:44 GMT
The loans are being traded at the wrong price. Doesn't sound very fair to me. How can the AERs be correct? The AER is being calculated based on the price paid and the payments remaining so it's perfectly correct. Since it's the AER that is what determines the return for buyers I don't think that the main price that should matter to a buyer is wrong. Remember that these loans don't come with a right to repay early and Ablrateandy has written in the past that if there is a desire to repay early the interests of buyers on the secondary market will be looked after so they don't make a surprise loss due to a purchase premium being paid. So we don't have the early repayment risk that is present at some other places and can confidently pay a premium, something I have done many times on various loans here, though not this particular one where I got enough in the initial purchase. However, another thing that Ablrateandy has written is that if there is a clear case of a trade that was flawed he'd be open to the idea of cancelling the trade. Someone who has a history of buying at say 9% AER would I assume get a decline because they have demonstrated in that way that they are willing to accept that price. But someone with a record of only buying at a discount to the capital value and premium on the return might well get a much more receptive hearing. If you think that this does apply to you I suggest waiting for a few days to ponder whether the AER you bought at really was inconsistent with your previous purchases then, if it was, letting Ablrate know your concerns. Or alternatively you could just look to sell yourself, since at current prices there is probably going to be now or in the not very distant future an opportunity to sell at a profit on this loan, so it's not actually likely that any buyer has actually lost out unless they are really desperate to get out rapidly rather than being a little patient and making a profit.
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SteveT
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Post by SteveT on Dec 4, 2015 21:56:51 GMT
Yes and thanks to all. We haven't suspended it because we feel that the AER is clearly marked and the error, whilst irritating, is not causing any major harm or loss. The people who are "at risk" are people who leave bids up for a long time and forget about them because the AER on a fixed price bid is falling daily. We have flagged it a couple of times and I will re-flag on my next update e-mail . If I thought it was "unfair" I would suspend straight away... . The loans are being traded at the wrong price. Doesn't sound very fair to me. How can the AERs be correct? Because the AERs are calculated against the cash price you actually pay. How that price has been presented (as X% +/- versus a £Y starting price) is irrelevant to the AER calculation. A bit like getting "50% off" in the supermarket; what matters is the cash price you pay, not whether there is a notional discount off an equally notional starting price. [crossed with james]
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stevio
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Post by stevio on Dec 4, 2015 22:02:22 GMT
Yes and thanks to all. We haven't suspended it because we feel that the AER is clearly marked and the error, whilst irritating, is not causing any major harm or loss. The people who are "at risk" are people who leave bids up for a long time and forget about them because the AER on a fixed price bid is falling daily. We have flagged it a couple of times and I will re-flag on my next update e-mail . If I thought it was "unfair" I would suspend straight away... . No this is NOT acceptable People, myself included, have purchased some of these loans, attracted initially by the appearance of a discount on the Secondary Market page. If you see loans offered at 99%, from anyone's point of view, you are expecting a discount. Not to be DECEIVED into paying a premium I thought the AER was just not calculating correctly, how is someone without a maths degree supposed to work out that Ablrate's system is not working correctly and actually charging a premium!!!!!! If Ablrate's system is not working correctly then buyers should be refunded the difference, the SM sales suspended and the issue fixed ablrateandy I find your dismissive attitude highly frustrating and you will be hearing from me next week
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james
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Post by james on Dec 4, 2015 22:09:32 GMT
We haven't suspended it because we feel that the AER is clearly marked and the error, whilst irritating, is not causing any major harm or loss. The people who are "at risk" are people who leave bids up for a long time and forget about them because the AER on a fixed price bid is falling daily. We have flagged it a couple of times and I will re-flag on my next update e-mail . If I thought it was "unfair" I would suspend straight away... . It would be a good idea to include worked examples for the day the second payment is made and the day of the third payment but more important is just cancelling all offers when the fix is made, so no stale prices remain in the market. Or alternatively you could update the premium/discount to the correct ones based on the prices in effect at the time, so the 99% would change to 104% or whatever and the price and AER not change.
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Post by ablrateandy on Dec 4, 2015 22:17:47 GMT
I'm sorry but I do not think that I have been dismissive at all. I have explained the situation and how it is working. All trades are very clearly marked up with how much you are paying for the relevant amount of the loan and what the AER on the transaction is. The AER is displayed both at the point of offer and before the point of execution. The amount being paid is being posted before the point of execution. This is not a situation where we are advertising one thing and then taking extra money from your account. We have considered suspending and notified people of the issue twice by email and warned them that they should trade this loan with their eyes open.
I would thoroughly discourage people from acting on the basis of "it was at a discount" because this is a fundamental mistake in lending. If we had two loans that were identical apart from one being at 6% and one at 10%, buying the 6% loan "because it was being offered at 99.50 and the other one was at 100.50" is NOT a sensible lending decision.
I am more than happy to look at individual cases, as I have stated before, so please do email me. We are trying to strike a balance between keeping the loan liquid and protecting lenders as we have a responsibility to everyone. A solution should be implemented soon that will make the trading a little more straightforward.
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