Definition of Mark to Market
Mark to market (also recognized as Fair Value Accounting) can be described as the accounting that decides the ‘Fair value’ of an asset and liability depending on current market value or applicable for comparable assets and liabilities. Mark-to-Market (MTM) can be defined as the measure of the accounts, assessed by fair value that has changeable properties, like assets and liabilities.
Mark to market is the financial method which provides the current view into an institution's or company's current financial situation. It is an accounting act in which the current value of a security, portfolio or account is assessed rather than deciding its book value. Accounting statements of mark-to-market changes its value on the balance sheet based on the market alternating conditions.
Books on Mark to Market
Mark-to-market: managing the bank portfolio under FASB #115, Issue 115 By John Edward Bowen (published by Probus Pub. Co., 1994)
Energy Companies and Market Reform: How Deregulation Went Wrong By Jeremiah D. Lambert (published by PennWell Books, 2006)
How Mark to Market works?
Mark to market can be understandable by a few examples, with these real life examples the notion of Mark to market can be defined perfectly, here are two of examples are described below,
- Suppose a person holds stocks in his brokerage account are marked-to-market every day, at the closing bell the larger market of buyers and sellers will decide the assigned price of each share that he is holding, it would be at the end of the day. No other pricing information is included.
- Let’s say that a person named Tom has 10 shares of stock, and each share is worth of $4, as the market changes the price reaches $6 per share, so the mark-to-market value of the shares will be $60 (10 shares * $6= $60), but the book value of those share will remain $40 (10 shares * $4= $40). But when the market goes down; as a result, the share might reach $3, the mark-to-market value will come down at $40, whereas the book will remain at $40, so the investor will face the loss of $10.
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