DEFINITION of 'Commuted Value'
The present value of the future series of cash flows required to fulfill a pension obligation. Commuted value is therefore the net present value of a future financial obligation. This value can be computed mathematically assuming a given rate of interest.
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BREAKING DOWN 'Commuted Value'
Pension fund managers must compute commuted value in order to determine their payout obligations and reserve requirements. The process for this calculation is similar to computing net present value of a capital budgeting project. The higher the interest rate, the lower the amount required, and viceversa. The further into the future the money will be required, the lower the commuted value, and viceversa.
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