Yield maintenance is a type of prepayment premium on a commercial mortgage loan. When a borrower prepays the loan, they must pay the lender an amount that effectively compensates the lender for the interest income they lose due to the early repayment. This amount is calculated to maintain the lender's original yield on the loan, as if the loan had not been prepaid.
The core idea is to neutralize the lender's loss of future interest payments. If interest rates have fallen since the loan was originated, the lender would not be able to reinvest the prepaid principal at the original, higher rate. Yield maintenance aims to make up this difference. Conversely, if interest rates have risen, the lender can reinvest at a higher rate, and the yield maintenance payment might be smaller or even zero.
The calculation can be complex, but it generally involves determining the present value of the remaining cash flows of the loan, discounted at the yield required by the lender at the time of prepayment. This is often based on a benchmark interest rate (like Treasury yields) plus a spread.
How the Calculator Works:
This calculator estimates the yield maintenance payment based on the provided inputs:
Initial Investment: The principal amount of the loan.
Current Yield: The yield to maturity of the loan at the time of origination or the current market yield for similar investments.
Target Yield: The yield the lender expects to earn at the time of prepayment on comparable investments. This is often the yield on a Treasury security with a similar remaining term, plus a spread.
Years to Maturity: The remaining term of the loan.
Reinvestment Rate: The rate at which the lender can reinvest the prepaid principal until the original maturity date. This is typically assumed to be the Target Yield.
The formula used is a simplified representation of yield maintenance, focusing on the present value of future interest loss.
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function calculateYieldMaintenance() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var currentYield = parseFloat(document.getElementById("currentYield").value) / 100; // Convert percentage to decimal
var targetYield = parseFloat(document.getElementById("targetYield").value) / 100; // Convert percentage to decimal
var timeToMaturity = parseFloat(document.getElementById("timeToMaturity").value);
var reinvestmentRate = parseFloat(document.getElementById("reinvestmentRate").value) / 100; // Convert percentage to decimal
var resultDiv = document.getElementById("result");
resultDiv.textContent = ""; // Clear previous results
// Validate inputs
if (isNaN(initialInvestment) || isNaN(currentYield) || isNaN(targetYield) || isNaN(timeToMaturity) || isNaN(reinvestmentRate)) {
resultDiv.textContent = "Please enter valid numbers for all fields.";
return;
}
if (initialInvestment <= 0 || timeToMaturity <= 0) {
resultDiv.textContent = "Initial Investment and Years to Maturity must be positive.";
return;
}
if (currentYield < 0 || targetYield < 0 || reinvestmentRate reinvestmentRate) {
// This is a simplified formula for the present value of an annuity-like loss.
// PV = P * [1 – (1 + r)^-n] / r
// Where P is the annual loss, r is the target yield, and n is the years to maturity.
// This assumes the loss occurs each year and is discounted back to today.
// If targetYield is 0, the PV is simply the sum of future losses.
if (targetYield === 0) {
yieldMaintenancePayment = annualInterestLoss * timeToMaturity;
} else {
yieldMaintenancePayment = annualInterestLoss * (1 – Math.pow(1 + targetYield, -timeToMaturity)) / targetYield;
}
} else {
// If reinvestment rate is equal or higher than current yield, no yield maintenance payment is typically required.
yieldMaintenancePayment = 0;
}
// Display the result
if (yieldMaintenancePayment < 0) {
yieldMaintenancePayment = 0; // Payment cannot be negative
}
resultDiv.innerHTML = "Estimated Yield Maintenance Payment: $" + yieldMaintenancePayment.toFixed(2) + "";
}