Fair Value Computation Model

Our Fair Value Model is an easy to use Excel-based Model to determine the fair value of a financial instrument in accordance with ASC 820 (formerly FAS157). Fair value can be computed based on a market approach ("mark to market") or a model approach ("mark to model").

Our Tool is a model based approach which can be used with either observable (market-based) or unobservable assumptions (where market based assumptions are unavailable or not usable). The Model first determines the contractual cash flows for the instrument. It then determines the premium or discount based this contractual cash flow and a current market yield. Fair value is determined by adding the calculated premium or subtracting the calculated discount from the face value of the instrument.

This Model is especially useful for valuing a loan, pool of loans or morgatge backed security when the current yield differs from the contractual yield. A market yield can differ from the stated yield for a number of reasons such as interest rate increases and decreases and changes in the expectation of losses. This Model can also be used to fair value deposits with a fixed interest interest rate (such as time certificates of deposit).

Model Application

The Model can be used to compute fair value for the following types of transactions

1. For debt securities classified as held for trading or available for sale under ASC 320 (formerly FAS115)
   • That have a fixed yield that does not adjust with the market
2. By lenders who hold loans as available for sale
   • Can evaluate a single loan or pool or loans
   • Can model fixed or variable rate loans
   • Supports amortizing, interest-only and balloon payments
3. By entities that buy or repurchase loans or pools of loans
   • Can compute by loan or on a pool basis
4. By holders of Mortgage Backed Securities
5. For deposits with a fixed interest rate
   • Can compute a fair value of a liability based on current rates
6. By auditors
   • To audit the fair value computation for any of the transactions listed above

The Fair Value model provides three interest computation models: a 360/30 Interest model (approximation using 360 days per year with 30 days per month), Actual Days using the calendar days for each month and year (considering leap years and the actual number days in each month), and 360/Actual Days Interest model that considers the days in the month (including leap years) but sets the days in the year to 360 (an interest model used by some finance companies). Either interest model can be used to compute the fair value. The 360/30 model is commonly used to simplify straight-line interest computations while the actual days model is more precise.

The model can support maturities up to 480 months and provides inputs for unpaid principal balance, contractual rate and term. Any number of months (2 at a minimum) can be entered for the term of the instrument providing maximum flexibility.

The user also inputs the current market yield, which drives the valuation. Generally, this model is used when the contractual interest rate differs from the current market rate.

The Model allows you to select from an amortizing, interest only or balloon payment. As an added feature, the Model also allows you to adjust the default payment. This can be used to assume a certain constant level of prepayment, to capture a one time prepayment, or to true up the principal of a loan or pool of loans for actual prepayments.

The Model is an Excel Workbook with detailed computation and information display that can be provided to your auditors or client (if you are the auditor) to support your position.

The Fair Value Model is available for $899 (US Dollars) for download.

Product Details
This product can be purchased online and downloaded for immediate use. Once purchased, there are no ongoing costs, and it can be used by unlimited users within the same Company or entity. In order to use our Tools or Models, you must have a current version of Excel (Office XP or greater).

We offer a variety of Excel-based tools to assist companies in complying with many of the more difficult accounting requirements. This Model take assumptions as inputs and with the push of a button, produces a valuation based on those assumptions using industry-standard methods. The formulas are protected from tampering to prevent accidental deletion or modification.

We also provide consulting services to assist with Fair Value evaluations. Please contact us at consulting@procognis.com for more details.

Feel free to contact us at sales@procognis.com if you have any questions about this Model.

Example Screenshots from our Fair Value Model: