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CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features

A commercial mortgage loan of USD 40 million is secured by a property with annual net operating income of USD 4.5 million. The annual debt service on the loan is USD 3.0 million, and the appraised property value is USD 50 million. The debt service coverage ratio (DSCR) and loan-to-value (LTV) ratio are most likely:

DSCR is net operating income divided by debt service, 4.5 over 3.0, giving 1.50. LTV is the loan divided by property value, 40 over 50, giving 0.80. Therefore DSCR of 1.50 and LTV of 0.80 is correct.

  1. ADSCR 1.13; LTV 0.80
  2. BDSCR 1.50; LTV 0.80Correct
  3. CDSCR 1.50; LTV 1.25

Explanation

DSCR = NOI / debt service = 4.5 / 3.0 = 1.50. LTV = loan / property value = 40 / 50 = 0.80. The 1.25 figure inverts LTV, and 1.13 divides NOI by the loan balance-based figure incorrectly (4.5/4.0 style error).

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