Haircut to investments
haircut to investments: The term “cut” is used in finance. Both ends of a “haircut” are the current market value of an asset and the value quoted for the asset in question for the calculation of loan collateral, or alternatively, regulatory capital.
Simply put, the gap between an asset’s current market value and the value assigned to it specifically for loan collateral calculations or regulatory capital calculations.
A haircut occurs when a lender assigns a value to a collateral asset that is lower than what the requested loan amount requires.
A haircut can also be said to be a tag lower than the market value which is attached to an asset when it is being used as collateral for a loan.
When a lower than market value is placed on an asset when one wants to use such asset as collateral for a loan then that happening is a haircut placed by the financial institution or lender. Either the low or high (size) of the haircut, will depend on the underlying risk of the asset in question.