Lesson 2 of 25 · 6 min
How a shortfall is computed, line by line
The interest that accrued while you did nothing can be larger than the gap the notice reports.
A shortfall arrives as a single figure, which conceals that it is the last line of a long calculation. Every line above it can move independently, and knowing which one moved is the difference between understanding the call and guessing at it.
The calculation runs position by position. Each holding is priced, then multiplied by its own advance rate, and the products are added to give lending value. A broad equity index fund of 3,150 units at $184.20 is worth $580,230, and at a 72 percent advance rate it contributes $417,765.60. A large-company stock, 1,480 shares at $96.35, is worth $142,598 and at 58 percent contributes $82,706.84. A small-company stock worth 2,600 × $11.80 = $30,680 carries a zero advance rate and contributes nothing at all. Market value totals $753,508; lending value totals $500,472.44.
The other side of the comparison is built the same way. Principal drawn is $385,000. Interest has accrued for 39 days at an illustrative 7.42 percent on a 360-day basis: $385,000 × 0.0742 = $28,567 a year, or $79.35 a day, so $3,094.76 has accrued. The balance is $388,094.76.
Now the test. The threshold here is written against lending value at 77 percent, so the permitted balance is $500,472.44 × 0.77 = $385,363.78. The shortfall is $388,094.76 − $385,363.78 = $2,730.98. Notice what produced it. The principal alone, $385,000, passes the test with $363.78 to spare. The entire shortfall is accrued interest that was never drawn and never spent.
A shortfall does not require a price to move. Interest raises the numerator every day, so the line-by-line calculation drifts toward failure on its own.
Key terms
- Lending value
- Each holding's market value multiplied by its own advance rate, summed. The collateral figure the test uses when the agreement says so.
- Ineligible holding
- A pledged position with a zero advance rate. It is worth real money and contributes nothing to the collateral side of the test.
- Accrued interest
- Interest earned by the lender and not yet billed. It is part of the balance the moment it accrues, so it is part of the test.
Worked example
Every line of one shortfall
Three pledged holdings, a 77 percent threshold on lending value, $385,000 drawn 39 days ago at an illustrative 7.42 percent, Act/360.
- Index fund, 3,150 units at $184.20
- $417,765.60
- Large-company stock, 1,480 at $96.35
- $82,706.84
- Small-company stock, 2,600 at $11.80
- $0.00
- Lending value
- $500,472.44
- Balance
- $388,094.76
- Shortfall
- $2,730.98
$580,230 × 0.72.
$142,598 × 0.58.
$30,680 × 0.00.
$385,000 + $3,094.76 of accrual.
$388,094.76 − ($500,472.44 × 0.77).
The market value of the account was $753,508 and the operative collateral figure was $500,472.44. The gap was smaller than the interest that created it.
Check yourself
Market value $246,000, blended advance rate 64 percent, threshold 76 percent of lending value, principal $121,000, accrued interest $812.50. What is the shortfall?
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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.