Which formula represents the loan to value ratio?

The loan-to-value (LTV) ratio is calculated using the formula that represents the proportion of debt financing compared to the total value of the asset purchased. In this context, the correct representation is the ratio of debt to assets.

By using the debt/assets formula, you determine how much of the asset’s value is financed through borrowing. A higher LTV indicates greater leverage, which means that more of the asset is financed with debt, leading to increased financial risk if the value of the asset declines.

This ratio is crucial for lenders in assessing the risk of a loan; a high LTV suggests that the borrower has little equity in the property, which could be a red flag in terms of creditworthiness. Thus, understanding the LTV ratio helps both investors and lenders make informed decisions regarding financing and investment.