Lesson 1 of 25 · 7 min
What a stress is, as arithmetic rather than a mood
You replace five prices, add the rows again, and rerun four figures; nothing in that sequence has a temperature.
A stress is not a feeling about the market. It is a second copy of a statement in which some of the inputs have been replaced and every derived figure has been run again. The March document is the first copy. A stress is what you get when you change the prices, or the advance rates, and refuse to change anything else.
The March close is five holdings and a loan. Market value is $6,032,795. Lending value is $3,277,251.25. The closing balance is $1,858,563.47. The maintenance threshold is 70 percent of market value, so the trigger — the market value at which the balance is exactly 70 percent of the collateral — is $1,858,563.47 ÷ 0.70 = $2,655,090.67. Headroom is the gap between today's market value and that trigger: $6,032,795 − $2,655,090.67 = $3,377,704.33, which is 55.99 percent of the book.
stressed value = Σ (unitsᵢ × stressed priceᵢ); then recompute lending value, LTV, trigger, headroom
- stressed priceᵢ
- The price you feed the row. Everything else on the row is inherited from the statement.
- lending value
- Each stressed market value multiplied by that row's advance rate, then summed.
- LTV
- The same balance divided by the new market value, or by the new lending value.
- trigger, headroom
- Trigger is balance divided by the threshold. Headroom is current market value minus the trigger.
What the procedure does not contain is a view. It does not say the move is likely, temporary, or already in the price. It does not know whether nineteen percent is a bad month or a quiet one. Those questions live outside the arithmetic. Inside it, there are only inputs and the four figures they produce.
A mood has no units. A stress has a market value, a lending value, an LTV and a headroom figure, each of which can be checked by hand.
Key terms
- Stress
- A restatement of the facility in which selected prices or advance rates are replaced and every derived figure is recomputed.
- Trigger
- The collateral value at which the balance equals the maintenance threshold. On this facility it is the balance divided by 0.70.
- Headroom
- Current collateral value minus the trigger. Positive means the test still passes; negative is a shortfall.
Worked example
The March close, before any price is replaced
Closing balance $1,858,563.47. Market value $6,032,795. Lending value $3,277,251.25. Threshold 70 percent of market value.
- Trigger
- $2,655,090.67
- Headroom in dollars
- $3,377,704.33
- Headroom in percent
- 55.99%
- Market LTV
- 30.81%
- Inputs a stress is allowed to change
- Prices, or advance rates
$1,858,563.47 ÷ 0.70.
$6,032,795 − $2,655,090.67.
$3,377,704.33 ÷ $6,032,795.
$1,858,563.47 ÷ $6,032,795.
Not the balance, not the threshold, not the units.
The unstressed statement is already four computable figures. A stress is the same four figures after a deliberate change to the inputs.
Check yourself
The March balance is $1,858,563.47 and the threshold is 70 percent of market value. What is the trigger, and which of the two inputs to that figure does a price stress change?
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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.