Market value adjustments (MVA) deal with any and all types of annuities. An annuity refers to any capital investment that pays in regular, fixed amounts. It is often used with reference to insurance policies paying the beneficiary fixed amounts, but it can refer to any investment. The amount paid is regular and fixed; it cannot vary with interest rates or other key indicators.
Find the interest rate that was relevant at the time you bought the investment. This is the most important single variable because it needs to be compared with the interest rate that is relevant now. The difference between the two is how to determine what you, the investor, will walk away with.
Find the present interest rate that will be applied to your policy or investment. An MVA is only done when you withdraw money out of the investment early. Because the withdraw is sometimes unexpected, the firm with which you have placed the investment must coordinate how it will pay you, and from what. The point is that the firm must coordinate its underlying investments with the fact that a) you are withdrawing money from it and b) that you need to be paid a lump sum now.
Compare the differences between the two rates to determine whether a profit or loss will be made. If the rates are identical, then the money you get will be exactly the amount you initially invested. Outside of financial emergencies, the only reason you would take money out of an investment early is to take advantage of a fall in rates.
Find the present value of the investment relative to the change in rates. This is the mode of calculating its present value. MVA treats the annuity like bond value: when a bond is bought at 4 percent, and rates fall to 3.5 percent, the bond is now worth more. This is because no one wants the lower 2.5 paying rate if there might be 4 percent bonds on the market. Holding the 4 percent bond makes that paper more valuable than the lower bonds being offered. The MVA does the exact same thing, and the calculations are identical.
Subtract, or add, the value of the investment from the demand-based new value. Whatever the change in interest rates entails, it must be applied to the amount initially invested. If the new rate is lower, then you will add the new value. If it is higher, then you will subtract the new figure, and take a loss on the withdrawal, not including the early withdraw penalties and fees. The values you use for the calculations are not inherent in the annuity, but must be compared with current demand for paper on the money markets. If markets are down, a change in interest rates might not mean much to the investor. If bond volume is high, even a slight alteration in the present rate can mean a large sum of money.
Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."