Lesson 25 of 25 · 8 min

The rate is the term you can watch; the capacity is the one you cannot

One leg of the exposure was printed eighteen times and the other was printed never, and the unprinted one moved further.

Everything in this track has two legs. Only one of them is reported to the borrower, and it is not chosen for being the more consequential.

The rate is on every statement, usually at the top of the first page, and it is reconstructable from outside: the index has a published history, the spread is in the agreement, and the day count is stated. Given those three, any rate you were ever charged can be rebuilt. Lending value is computed inside the lender's system from an advance rate schedule that is not published and a market value the lender determines. It appears on no statement, and no upstream source can reproduce it.

Measure both across one illustrative eighteen-month stretch. The stated rate went from 6.05 percent to 7.40 — 1.35 points, or 22.31 percent in relative terms. Across the same eighteen months the pledged portfolio went from $2,163,000 to $1,744,000, a fall of 19.37 percent, and the blended advance rate went from 65 percent to 58, a cut of 10.77 percent. Lending value went from 2,163,000 × 0.65 = $1,405,950 to 1,744,000 × 0.58 = $1,011,520, a fall of 28.05 percent.

So the leg that was printed eighteen times moved 22.31 percent and the leg that was printed zero times moved 28.05. On a $1,108,000 balance against a 70 percent threshold, headroom went from 26.82 percent to 9.24 across the same period. Every one of those eighteen statements was accurate, and none of them contained the number that moved most.

You can reconstruct every rate you were ever charged from published data. You cannot reconstruct a single day's lending value from anything outside the lender's system.

That is where this track ends, without a conclusion attached. A borrower watching the rate is watching accurately; the rate is real, it is theirs, and it is correctly reported. It is also the observable half of a two-legged exposure whose other half is produced by the same environment and computed somewhere the borrower cannot see. The asymmetry follows from how the two numbers are made rather than from anyone's intent, and knowing which half you are looking at is what these twenty-five lessons were for.

Key terms

Observable leg: The part of an exposure that is reported and can be checked. Here, the rate — because it is printed and because its inputs are published.
Reconstructability: Whether a figure can be rebuilt from information available outside the lender. The rate can be; the lending value cannot.
Disclosure asymmetry: The gap between what is reported and what is consequential. Not a judgement about anyone, and a real feature of the arrangement.

Worked example

Eighteen months, two legs, one environment

An illustrative facility across eighteen months, with a $1,108,000 balance and a 70 percent maintenance threshold.

Stated rate, start and end: 6.05% to 7.40%
Times the rate was printed: 18
Market value, start and end: $2,163,000 to $1,744,000
Blended advance rate, start and end: 65% to 58%
Lending value, start and end: $1,405,950 to $1,011,520
Times the lending value was printed: 0

The leg that could be watched moved 22.31 percent. The leg that could not moved 28.05 percent. Both were produced by the same environment, and only one of them arrived in the post.

Check yourself

Across a period a facility's stated rate rose from 5.80 percent to 6.95 while market value fell 11.2 percent and the blended advance rate was cut from 62 percent to 57. Which figure moved further in relative terms?

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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.