Lesson 7 of 25 · 6 min
Recompute LTV on both bases
Nineteen percent takes market LTV to 38 and lending-value LTV to 70, and those two figures describe one afternoon.
Loan to value is the balance divided by collateral value. The March agreement writes the maintenance test against market value, so that is the operative basis. The other basis — balance divided by lending value — is still worth computing, because it is the figure a different agreement, or a later revision, would run.
On the March close the two LTVs are $1,858,563.47 ÷ $6,032,795 = 30.81 percent and $1,858,563.47 ÷ $3,277,251.25 = 56.71 percent. After the 19 percent uniform move they are 38.03 percent and 70.01 percent. After Calder's 37 percent they are 34.73 percent and 61.16 percent. After both, 40.80 percent and 73.21 percent. After the 60 percent uniform move, 77.02 percent and 141.78 percent.
The 60 percent case is the first in which the operative test fails: 77.02 percent sits above 70. The same afternoon's lending-value LTV is already 141.78 percent, which is a statement that the loan is larger than the haircut-adjusted collateral, not merely larger than 70 percent of it.
The pair, written out so the two bases stay attached to their percentages:
- March close: 30.81 percent market, 56.71 percent lending.
- Uniform 19 percent: 38.03 percent market, 70.01 percent lending.
- Calder −37 percent: 34.73 percent market, 61.16 percent lending.
- Both: 40.80 percent market, 73.21 percent lending.
- Uniform 60 percent: 77.02 percent market, 141.78 percent lending.
A percentage without its basis is not an LTV. Thirty-eight and seventy are the same loan on the same day.
Key terms
- Market-value LTV
- Balance divided by the sum of the rows at last prices. The basis this facility's 70 percent threshold is written on.
- Lending-value LTV
- Balance divided by the sum of the rows after advance rates. A tighter figure on the same loan.
- Basis
- Which denominator the ratio uses. Stating an LTV without it is stating a number that can be read two ways.
Worked example
One balance, ten percentages
Balance held at $1,858,563.47. Each pair is market LTV then lending-value LTV.
- March close
- 30.81% / 56.71%
- Uniform 19 percent
- 38.03% / 70.01%
- Calder −37 percent
- 34.73% / 61.16%
- Both
- 40.80% / 73.21%
- Uniform 60 percent
- 77.02% / 141.78%
Operative test passes; other basis is at the line.
Operative test still passes.
Operative test fails.
The operative failure arrives only in the 60 percent case. The other basis has already been at or through 70 percent twice.
Check yourself
After both moves, market value is $4,555,363.05 and lending value is $2,538,653.20. What is LTV on each basis, and which figure does this facility's 70 percent test read?
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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.