Fair market value (FMV) is the price that an asset would sell for on the open market under normal circumstances. It is based on the assumption that both the buyer and seller are well-informed about the asset and are acting in their own best interests.
In the context of securitization, FMV is used to determine the value of the underlying assets. This is important because the value of the underlying assets will determine the value of the securitization securities.
There are a few different methods that can be used to determine FMV, including:
- Comparable sales: This method involves comparing the asset to similar assets that have recently been sold.
- Discounted cash flow: This method involves estimating the future cash flows from the asset and then discounting them back to the present value.
- Asset-based valuation: This method involves estimating the value of the asset's underlying assets.
The method that is used to determine FMV will depend on the specific asset and the circumstances.
Here are some applications of FMV in securitization:
- Valuing underlying assets: FMV is used to value the underlying assets in a securitization. This is important because the value of the underlying assets will determine the value of the securitization securities.
- Pricing securitization securities: FMV is used to price securitization securities. This is important because the price of the securities will determine the return to investors.
- Regulatory compliance: FMV is used to comply with regulatory requirements. For example, FMV is used to calculate the capital requirements for banks and other financial institutions.