Loan-to-value ratio
LTV = Loan amount / Property value x 100
Loan = LTV x Property value
Borrower's margin = Property value - Loan
Any mortgage sizing question. The LTV cap decides the loan; the remainder is the borrower's own contribution.
- Loan amount
- Sanctioned principal
- Property value
- Value of the collateral as assessed by the lender
Origination fee
Fee = fee rate x Loan amount
Whenever an origination fee is quoted. It applies to the loan, not to the property value.
- fee rate
- Quoted origination fee, usually a fraction of a per cent
- Loan amount
- Sanctioned principal, after the LTV cap
Tranche loss waterfall
Loss to a tranche = min(remaining loss, tranche size)
Remaining loss passes up to the next tranche
Senior tranche is safe until loss > total subordination
Allocating losses in a securitisation or CDO. Always work from the bottom slice upward, and compute total subordination to find the senior tranche's cushion.
- tranche size
- Face value of that slice of the securities
- subordination
- Total size of all slices below the one you are pricing
Leverage and the wipe-out point
Leverage L = Assets / Equity
Critical asset fall = 1 / L
Remaining equity = Equity - (fall % x Assets)
Any leveraged vehicle: an SIV, a margin position, a bank. At 10 to 15 times leverage a fall of 6.7% to 10% erases the equity.
- Assets
- Market value of what the vehicle holds
- Equity
- Own funds, the residual after debt
TED spread
TED spread = Interbank rate - Treasury bill yield (same tenor)
1 percentage point = 100 basis points
To measure credit risk in the banking system. Read both legs: a widening spread usually means interbank rates rising and bill yields falling as money runs to safety.
- Interbank rate
- Rate at which banks lend to each other, at the chosen tenor
- Treasury bill yield
- Government bill yield at the same tenor