Lesson 9 of 25 · 6 min
Two names, same market value, different lending value
Seventeen hundred dollars of wealth and a quarter of a million of collateral sit in the gap between two neighbours.
Meridian Industrial common is $1,838,300. Calder Growth common is $1,840,005. The market values differ by $1,705, which is 1,705 ÷ 1,838,300 = 0.09 percent. On a holdings page they are the same fact twice: two large single-name commons, each about $1.84 million.
They are not the same collateral. Meridian at 50 percent contributes $1,838,300 × 0.50 = $919,150. Calder at 35 percent contributes $1,840,005 × 0.35 = $644,001.75. The lending values differ by 919,150 − 644,001.75 = $275,148.25. Almost identical wealth, and $275,148.25 less lending value on the growth name — a gap 161 times the gap in market value.
The fifteen-point rate gap is doing nearly all of the work. Applied to Calder's market value it is 1,840,005 × 0.15 = $276,000.75, which is the lending value Calder would have gained at Meridian's 50 percent. The $1,705 of extra Calder market value, advanced at 35 percent, adds only $596.75, which is why the two gaps — $275,148.25 observed, $276,000.75 from the rate alone — sit so close.
Track 1 lesson 3 used two invented million-dollar accounts to make this point. The March statement is the same point without the invention: the two largest rows in one pledged pool, printed a few lines apart, already contain the whole lesson. A screen that shows one column cannot show it.
When two neighbours have the same market value, the entire difference in what they support is the difference in the third term of the product.
Key terms
- Neighbour rows
- Two holdings of almost equal market value. On this statement, Meridian and Calder.
- Rate gap
- The difference between two advance rates. Fifteen points here, which is $276,000.75 on Calder's size.
- Lending-value gap
- What remains after two products are subtracted. $275,148.25 between Meridian and Calder.
Worked example
The $1,705 that does not matter, and the $275,148.25 that does
Meridian $1,838,300 at 50 percent. Calder $1,840,005 at 35 percent.
- Market-value gap
- $1,705
- Meridian lending value
- $919,150
- Calder lending value
- $644,001.75
- Lending-value gap
- $275,148.25
- Fifteen points on Calder's size
- $276,000.75
$1,840,005 − $1,838,300.
$1,838,300 × 0.50.
$1,840,005 × 0.35.
$919,150 − $644,001.75.
$1,840,005 × 0.15.
The rate gap explains the collateral gap. The $1,705 of extra Calder wealth explains almost none of it.
Check yourself
Meridian is $1,838,300 at 50 percent and Calder is $1,840,005 at 35 percent. What is the lending-value gap, and what figure is almost the same size?
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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.