Lesson 21 of 25 · 6 min

Sequence: price first, then haircut, then a rate reset

On a market-value test the three shocks commute; on a lending-value test the first one already fails.

Three shocks, in this order: a 19 percent uniform price move, then Calder's advance rate cut from 35 percent to 20 percent, then ten days of accrual at a reset rate of 8.47 percent — the March close rate of 7.22 percent with the index 125 basis points higher. Illustrative reset, not a quote.

After the price move, market value is $4,886,563.95 and lending value is $2,654,573.52. The market-value test still has 45.67 percent of headroom. The lending-value figure sits $517.15 under $2,655,090.67, so a 70 percent test written on lending value has already failed, by $517.15, before the haircut or the reset has happened.

The haircut then takes lending value to $2,431,012.91 and leaves market value where the 19 percent move put it. Market LTV is still 38.03 percent. Lending-value LTV is 76.45 percent. Ten days at 8.47 percent add $1,858,563.47 × 0.0847 × 10 ÷ 360 = $4,372.79. The balance becomes $1,862,936.26. The trigger becomes $2,661,337.51. Market headroom is $4,886,563.95 − $2,661,337.51 = $2,225,226.44. Still a pass on the operative test.

If the first shock had forced a sale — which it would have, on a lending-value writing — the second and third shocks would have been applied to a smaller book. On this facility's market-value writing, no sale is forced at any of the three steps, so the ending book is the stacked totals and a slightly higher balance. Sequence is silent when every intermediate test passes. It is loud the moment one of them does not.

Key terms

Sequence: The order in which a price move, a haircut widening and a rate reset are applied. Ending totals agree if no sale sits between them.
Intermediate fail: A step in the sequence that breaches a test before the later steps are applied. It is what makes order matter.
Rate reset: A change to the index-plus-spread rate from which daily interest is computed. Here, 7.22 percent to an illustrative 8.47 percent.

Worked example

Price, haircut, reset — three prints

Uniform 19 percent, then Calder 35 to 20, then ten days at 8.47 percent Act/360. Illustrative reset.

After the price move, lending value: $2,654,573.52
After the haircut, lending value: $2,431,012.91
After the haircut, market LTV: 38.03%
Ten-day interest at 8.47 percent: $4,372.79
New balance, new trigger: $1,862,936.26 / $2,661,337.51
Ending market headroom: $2,225,226.44

The operative test passed at every step. A lending-value test would have failed at step one, and everything after that step would have been a different book.

Check yourself

A 19 percent uniform move takes lending value to $2,654,573.52 against a trigger of $2,655,090.67. Does a 70 percent market-value test fail at that step, and does a 70 percent lending-value test?

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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.