What it means
Some securities do not have a live market price. When a fund or company needs a figure for its books, a dealer may provide an indicative price based on recent trades of similar securities, but the dealer is not promising to buy or sell at that level.
Marking the quote for valuation only makes this clear. This matters because a quote that is firm and a quote that is indicative carry very different weight.
A firm quote is a commitment, whereas an FVO quote can be revised or withdrawn at any time. Treating an FVO price as if it were a firm bid is a common error that can cause nasty surprises when someone actually tries to sell.
FVO quotes are used mainly for valuing portfolios at period end, checking prices supplied by a pricing service, and producing statements for clients. They sit towards the lower end of the reliability scale used in fair value reporting, which is the hierarchy that ranks inputs from observable market prices down to estimates.
Auditors and risk teams look closely at how much of a portfolio depends on such quotes. A large share of value built on indicative prices means reported numbers could shift sharply if real trades take place at different levels.
Good practice is to use more than one source and to document how the valuation was reached. The phrase can occasionally appear in other settings, such as appraisals or reports marked as prepared for valuation purposes only.
In every case the meaning is the same: the figure informs a valuation and should not be relied on for any other purpose. Some firms add a short note to the end of every indicative price they send, saying that it is not a bid or an offer and may differ from where a trade could take place.
Reading that note is a good habit, because it tells you straight away how far the figure can be relied upon.
In practice
Real-world examples.
Example
A pension scheme holds a private placement bond that trades rarely. At year end, a broker sends an FVO quote of 98.20, which the scheme uses in its accounts. The notes to the accounts explain that the figure is indicative.
Example
An asset manager receives two FVO quotes for the same loan, one at 91 and one at 94. She uses the average and records the range in her valuation memo for the auditors.
Example
A small business holds a $300,000 investment in an unlisted debenture. Its bank provides a valuation marked FVO for the annual report. The finance manager notes that it cannot be used to arrange a sale. Each of these uses is legitimate as long as the figure is described honestly.
Formula
Calculation
Market value = number of bonds x face value per bond x quoted price as a percentage of face value
Suppose a fund holds 200 corporate bonds, each with a face value of $1,000, and a dealer provides an FVO quote of 97.50% of face value. Market value = 200 x $1,000 x 0.975 = $195,000.
If the fund then tried to sell and the best firm bid was 95.00%, the proceeds would be 200 x $1,000 x 0.95 = $190,000. The $5,000 gap is the cost of treating an indicative price as if it were a firm one.Case study
Seen in the real world.
Harbourline Funds is a fictional bond fund that held a number of thinly traded securities. At month end, the pricing team used FVO quotes for 15% of the portfolio. Everything seemed routine until a large investor asked to redeem $4,000,000 in one go.
To raise the cash, the fund tried to sell some of the thinly traded bonds. In this illustrative case, the best firm bids came in about 3% below the FVO quotes used for the monthly price, so the sale realised less than the carrying value.
The fund's board introduced a rule that no more than 5% of the portfolio could be valued on indicative quotes alone, and required a second source for each. It also began reporting to investors how much of the portfolio relied on indicative pricing. The board also asked the valuation committee to meet quarterly and to test a sample of indicative prices against actual trades, so that any gap between the two could be spotted quickly.
Watch out
Common mistakes.
- Treating an FVO quote as a firm price at which an asset can actually be sold.
- Relying on a single FVO source when two or three would show how uncertain the value is.
- Failing to disclose that reported values rest on indicative quotes, which can mislead users of the accounts.
Questions
People also ask.
Is an FVO quote legally binding?
No. The dealer is not obliged to trade at the quoted level, which is the whole point of the label.
Why would a dealer give an FVO quote at all?
It helps clients value holdings and keeps the dealer in touch with the client, without exposing the dealer to a trading commitment.
How is FVO different from fair value?
Fair value is an accounting concept for what an asset would sell for in an orderly market, while FVO is a label on one particular quote.
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