It is good or bad ?
What is its importance ?
It is a reduction of value in some form (just like when you have a haircut-you end up with less hair!).
It could be the value of an asset being used as collateral ( a sort of safety margin for the lender) or maybe a bond redemption value could be reduced.
If you have an asset with a merket value of ￡100 you may only be able to borrow 90% of its value. I suppose it is a sort of safety margin for the unexpected.
In finance, a haircut is a percentage that is subtracted from the market value of an asset that is being used as collateral.The size of the haircut reflects the perceived risk associated with holding the asset. However, the lender has a lien for the entirety of the asset. The higher the haircut, the safer the loan is for a lender. The haircut and the LTV add up to 100%.
For example, United States Treasury bills, which are seen as fairly safe, might have a haircut of 10%, while for stock options, which are seen as highly risky, the haircut might be as high as 30%. In other words, a $1000 treasury bill will be accepted as collateral for a $900 loan, while a $1000 stock option might only allow a $700 loan.
Please give an example.
It is good or bad ?
What is its importance ?
