CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features
A lender grants a mortgage loan of 240,000 on a property appraised at 300,000. The loan-to-value ratio and the most likely implication for the lender's risk are best described as:
The loan-to-value ratio is 80%, found by dividing 240,000 by 300,000. A lower ratio means the borrower has more equity at stake and the lender has a larger cushion against falling property values, so default risk is lower than for a 90% loan on the same property.
- A75%, with lower default risk than an 90% ratio loan on the same property
- B80%, with lower default risk than a 90% ratio loan on the same propertyCorrect
- C80%, with higher default risk than a 90% ratio loan on the same property
Explanation
LTV = 240,000 / 300,000 = 80%. A lower LTV means the borrower has more equity, so the lender has a larger cushion and default risk is lower than with a 90% LTV loan. The 75% option miscalculates the ratio.
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