Lesson 8 of 25 · 6 min

Haircut as the complement

The withheld fraction is the same fact as the advanced fraction, read from the other end of the row.

A haircut is one minus the advance rate. Track 1 lesson 4 introduced it as a price for time: the fraction of market value the lender refuses to count, sized for the window in which a sale would run. On a row the two percentages are complements. They add to one, and they describe one decision.

haircut = 1 − advance rate

haircut: The fraction of market value withheld from lending value.
advance rate: The fraction counted. The complement of the haircut.
1: The whole of the row's market value, before the split.

Calder's advance rate is 35 percent, so its haircut is 1 − 0.35 = 65 percent. Of $1,840,005 the facility withholds 1,840,005 × 0.65 = $1,196,003.25 and counts $644,001.75. The government fund's advance rate is 85 percent, so its haircut is 15 percent. Of $951,390 the facility withholds 951,390 × 0.15 = $142,708.50 and counts $808,681.50. Same identity, two very different withholdings.

The book-level leftover is not a haircut in the same sense. Market value minus lending value is 6,032,795 − 3,277,251.25 = $2,755,543.75, which is 45.68 percent of the pool. That 45.68 percent is a blend of five haircuts, weighted by market value, and it hides Calder's 65 and the fund's 15 in exactly the way lesson 3 and lesson 4 hid the rates. A complement of a blend is still a blend.

Switching vocabulary from advance to haircut does not add information. It points at the dollars that were removed, which is sometimes the clearer view of the same cell.

Key terms

Haircut: One minus the advance rate. The share of a row's market value that does not become lending value.
Complement: Two numbers that add to one. Advance rate and haircut are complements on every row.
Book-level leftover: Total market value minus total lending value. A blend of haircuts, not a haircut the lender set.

Worked example

Two complements on the March book

Calder at 35 percent and the government fund at 85 percent, plus the pool leftover.

Calder haircut: 65%
Calder dollars withheld: $1,196,003.25
Government-fund haircut: 15%
Government-fund dollars withheld: $142,708.50
Book-level leftover: $2,755,543.75

Calder alone accounts for $1,196,003.25 of the leftover — 43 percent of every dollar the schedule refused.

Check yourself

Calder's haircut is 65 percent and the government fund's is 15 percent. How many dollars does each row withhold on the March statement, and why is the book's 45.68 percent leftover not 'the haircut'?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.