Valuing assets: The difference between mark to market and mark to model

Julie Brownlee, Fsp Invest, 06 Oct. 2015

Tags: mark to model, mark to market, valuation methods, valuing assets, what is mark to model,

When it comes to valuing assets, the most common way method is mark to market. But there is another method called mark to model.

So what is the difference between these two valuation methods?

Let’s take a closer look…

What is mark to market?

Mark to market is a common valuation method. The basis of an asset’s value (such as shares or bonds) is its market price.

For example, you have shares in Company ABC. They’re currently trading at R15 a share, so using mark to market, this is the value of these shares in your portfolio.

What is mark to model?

On the other hand, mark to model is a valuation method for securities that rarely trade and there isn’t a recent reference price to use.

Instead, internal pricing models or assumptions determine the value of these securities. This is mark to model.

These securities tend to be complex derivatives contracts and securitised debt instruments, explain the experts at Money Week.

The problems with the mark to model valuation method

The subprime mortgage crisis back in 2007 showed the problems with using this valuation method. Valuations can be wrong.

In the case of the subprime crisis, rates of default were much higher than forecast and holders of these securities ended up having to write off tens of billions of dollars.

Another problem with this method is that these illiquid securities are hard to sell quickly at a fair price. Portfolios using mark to model don’t necessary reflect a realistic value.

So there you have it. The difference between mark to market and mark to model.

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