What is yield maintenance?
How to calculate yield maintenance?
A real estate investor in San Francisco is looking to pay off his loan’s remaining balance with 3 years remaining. The investor was issued a 10-year at a 7% interest rate with a remaining balance of $1M. The investor goes to the U.S. Department of the Treasury website and sees that the 3-year treasury yield is at 1.5%.
PV of Balance = 1 – (1 + treasury yield) ^ (-total payments left / annual payments) * remaining balance
PV of Balance = 1 – (1 + .015) ^ (-36 / 12) * $1M
PV of Balance = $2,912,200
Yield Maintenance = Present Value of Remaining Balance * (Interest Rate – Treasury Yield)
Yield Maintenance = $2,912,200 * (7% – 1.5%)
Yield Maintenance = $2,912,200 * 5.5%
Yield Maintenance = $160,171