Lesson 17 of 25 · 6 min
A 63 percent advance rate that is then cut to 48
A 15-point cut on Meridian removes $275,745, almost the same dollar figure as the Calder cut, because the two rows were almost the same size.
Meridian Industrial is 12,400 shares at $148.25, worth $1,838,300, advancing at 50 percent on the March schedule. Suppose the row is first recognised at 63 percent and is then cut to 48 percent. Both figures are advance rates on the same unmoved market value. The cut is 15 points, the same width as the Calder cut in the price-still lesson.
At 63 percent, Meridian's lending value is $1,838,300 × 0.63 = $1,158,129. At 48 percent it is $1,838,300 × 0.48 = $882,384. The drop is $1,158,129 − $882,384 = $275,745, which is also $1,838,300 × 0.15. Calder's 15-point cut cost $276,000.75. The two dollar figures sit $255.75 apart because the two March market values sit $1,705 apart.
Against the March book, recognising Meridian at 63 percent lifts total lending value from $3,277,251.25 to $3,277,251.25 − $919,150 + $1,158,129 = $3,516,230.25. Cutting it to 48 percent then takes the total to $3,277,251.25 − $919,150 + $882,384 = $3,240,485.25, which is $36,766 below the original March total. The generous rate was never a floor. It was a starting point.
Market LTV is unchanged through both prints, because Meridian's last price has not moved. Lending-value LTV goes from 56.71 percent on the March schedule to $1,858,563.47 ÷ $3,516,230.25 = 52.86 percent at 63, then to $1,858,563.47 ÷ $3,240,485.25 = 57.35 percent at 48. The operative test slept through a 15-point revision on the second-largest row.
Key terms
- Advance-rate revision
- A change to the percentage a named row advances at, with the last price held. The dollar effect is market value times the point cut.
- Starting rate
- The advance rate first assigned to a row. It is not a commitment to keep that rate, and it is not a floor under later cuts.
- Near-equal rows
- Two holdings whose market values sit close enough that an equal point-cut produces almost equal dollar damage. Meridian and Calder on this statement.
Worked example
Meridian at 63, then at 48, prices still
Meridian market value held at $1,838,300. Advance rate moved from the March 50 percent to 63 percent, then to 48 percent.
- Lending value at 63 percent
- $1,158,129
- Lending value at 48 percent
- $882,384
- Drop on the cut
- $275,745
- Calder's 15-point cut, for comparison
- $276,000.75
- Book lending value at 48 percent
- $3,240,485.25
- Lending-value LTV at 48 percent
- 57.35%
$1,838,300 × 0.63.
$1,838,300 × 0.48.
$1,838,300 × 0.15.
Fifteen points on Meridian and fifteen points on Calder are the same arithmetic on two rows that happened to be almost the same size.
Check yourself
Meridian is worth $1,838,300. Its advance rate is cut from 63 percent to 48 percent. What is the drop in lending value, and why is it within a few hundred dollars of Calder's 15-point cut?
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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.