Lesson 20 of 25 · 6 min

Interest continuing to accrue during the stress

Nineteen days at 7.22 percent on Act/360 adds $7,082.16 to the balance and $10,117.37 to the trigger.

Every price stress in this track has held the balance at $1,858,563.47. Interest does not hold. The March close rate is 7.22 percent on an Act/360 basis, and each further day adds a further slice to the numerator of LTV and to the trigger.

One day's interest is $1,858,563.47 × 0.0722 ÷ 360 = $372.745… . Nineteen days, rounded once at the end, are $1,858,563.47 × 0.0722 × 19 ÷ 360 = $7,082.16. The new balance is $1,858,563.47 + $7,082.16 = $1,865,645.63. The new trigger is $1,865,645.63 ÷ 0.70 = $2,665,208.04, which is $10,117.37 above the March trigger. The extra trigger is the extra interest divided by 0.70: $7,082.16 ÷ 0.70 = $10,117.37.

On the 60 percent book that extra trigger is extra shortfall. Market value is still $2,413,118.00. Shortfall becomes $2,665,208.04 − $2,413,118.00 = $252,090.04, against the $241,972.67 computed on the March balance. The sale to cure becomes $252,090.04 ÷ 0.30 = $840,300.13, which is $33,724.56 more than $806,575.57.

On the 19 percent book the same nineteen days do not create a shortfall. Market value is $4,886,563.95 against a trigger of $2,665,208.04, so headroom is still $2,221,355.91. Accrual during a stress is not what fails a comfortable test. It is what widens a test that has already failed, on a clock that has nothing to do with the prices.

Key terms

Accrual during a stress: Interest added to the balance while the prices are being restated. It raises the trigger even when no price moves further.
Trigger drift: The increase in the trigger caused by accrual. Equal to the extra interest divided by the threshold.
Act/360: The day-count on this facility: actual days charged, annual rate divided by 360. The March close rate is 7.22 percent.

Worked example

Nineteen quiet days on top of the 60 percent book

Balance $1,858,563.47 at 7.22 percent, Act/360. Nineteen further days. Market value held at $2,413,118.00.

Nineteen-day interest: $7,082.16
New balance: $1,865,645.63
New trigger: $2,665,208.04
New shortfall: $252,090.04
New sale to cure: $840,300.13

The prices did nothing for nineteen days and the shortfall grew by $10,117.37. The clock on the loan and the clock on the holdings are not the same clock.

Check yourself

Nineteen days at 7.22 percent, Act/360, on $1,858,563.47 add $7,082.16 of interest. What is the new trigger, and by how much does the 60 percent shortfall widen?

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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.