Lesson 2 of 25 · 6 min
What an advance-rate schedule actually is
One page assigns a lending percentage to every asset class, and it was written long before anyone read your application.
The advance rate is not quoted to you. It is looked up. Somewhere inside the institution there is a table with asset categories down one side and percentages across the other, and your portfolio is matched against it line by line.
That table is a governed document. It carries a version number and an effective date, it is owned by a risk function rather than by the person who arranges your loan, and it is approved at a level well above that person. It applies to every borrower at once. When it changes, it changes for all of them.
A typical schedule runs from cash at the top to categories carrying nothing at the bottom. Illustrative rows, not quotes: cash and money-market balances at 95 percent; short-duration government paper at 90; an investment-grade bond fund at 80; a broad-market index fund at 70; a large listed single company at 55; a mid-sized listed company at 40; a thinly traded small company at 20; anything restricted, unlisted or below a price floor at zero.
Applying the schedule to a mixed portfolio produces a blended advance rate, which is total lending value divided by total market value. That blended figure is the one that describes your account, and it is an output rather than an input. Nobody set it. It fell out of the row-by-row lookup, and it moves whenever the mix moves, even if every row in the schedule stays exactly where it was.
Key terms
- Advance-rate schedule
- The lender's internal table of percentages by asset category. Versioned, dated, applied uniformly, and not specific to any one borrower.
- Blended advance rate
- Total lending value divided by total market value across a whole portfolio. A result of the mix, not a rate anyone assigned.
- Effective date
- The date from which a version of the schedule applies. The reason two borrowers can be quoted different rates for the same asset.
Worked example
Turning a schedule into one number
A $1,150,000 account run through the illustrative schedule above.
- Cash and money-market $84,000 at 95%
- $79,800
- Short government bond fund $210,000 at 90%
- $189,000
- Broad-market index fund $476,000 at 70%
- $333,200
- One large listed company $318,000 at 55%
- $174,900
- One thinly traded small company $62,000 at 0%
- $0
- Blended advance rate
- 67.6%
$776,900 total lending value divided by $1,150,000.
No conversation produced 67.6 percent. Five lookups and a division did, and a single trade would change it.
Check yourself
A $600,000 account holds $150,000 of short government paper at a 90 percent advance rate, $300,000 of a broad index fund at 70 percent, and $150,000 of a restricted holding at zero. What is the blended advance rate?
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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.