Thursday January 12. What is this new concept Fair Value? FV = S [1 + (I - D)]

Thursday January 12, 2012. What is this new concept Fair Value? FV = S [1 + (I - D)]

One of the most frequently asked questions from viewers calling into CNBC's morning Squawk Box is "What is Fair Value?" "S" is the S&P 500 Stock Index. The ticker symbol is SPX and/or INX on most platforms.

"I" is the amount of Interest paid to your banker or broker to borrow the money to buy all of the stocks in the S&P 500 Index. The interest is calculated based on a percentage lending rate (R) from the current date (today) until the date that the S&P Futures Contract expires in March, June, September, or December.

"D" is the amount of Dividends paid to you from the companies that you own in the S&P 500 Index that pay a dividend. This dividend income is expressed as a percentage rate too.

That's it. Very simple. FV is nothing more than......the value of S&P 500 Index, plus the interest I pay my broker to buy all of the stocks in it, minus all of the dividend checks I get from those stocks.

Now that you know what FV is, you can go on to learn exactly what it means and how it works. For example:Did you know that FV is basically irrelevant for most investors?