CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features
A CMBS loan has a current balance of 40 million and the property is appraised at 50 million. The loan-to-value ratio and the implication for credit risk are most accurately described as:
The loan-to-value ratio is 40 million divided by 50 million, or 80%. A lower LTV means greater equity cushion and lower credit risk for lenders, so the statement that a lower ratio indicates lower credit risk is correct.
- A125%, indicating the loan exceeds collateral value
- B80%, where a lower ratio indicates lower credit riskCorrect
- C80%, where a lower ratio indicates higher credit risk
Explanation
LTV = 40 / 50 = 80%. A lower LTV means more borrower equity and a larger cushion for the lender, so credit risk is lower. 125% inverts the ratio.
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