A scenario where the investor pays $98,000 for a $100,000 note is an example of what type of pricing?

• A. Premium pricing
• B. Market rate pricing
• C. Below par discount pricing
• D. Above par pricing

Answer: (C)

In this scenario, where the investor pays $98,000 for a $100,000 note, we are looking at below par discount pricing. This type of pricing occurs when the purchase price of a financial instrument, like a note, is lower than its face value. In this case, the investor is buying a note at a discount of $2,000 (the difference between the face value of $100,000 and the purchase price of $98,000).

This can happen for various reasons, such as the prevailing interest rates in the market being higher than the interest rate attached to the note, or the note possibly having conditions that might make it less desirable to potential buyers. As a result, investors generally demand to purchase these notes at a discount to compensate for the perceived reduced value or increased risk.

Understanding below par discount pricing is crucial in mortgage banking as it significantly impacts the yield the investor receives over the life of the note, making it an important concept in evaluating investment opportunities in mortgage notes.