Level 2 Assets

AAA

DEFINITION of 'Level 2 Assets'

Assets that do not have regular market pricing, but whose fair value can be readily determined based on other data values or market prices. Sometimes called "mark to model" assets, Level 2 asset values can be closely approximated using simple models and extrapolation methods using known, observable prices as parameters. Part of an overall requirement of publicly-traded companies is that they are required to report to investors the makeup of their assets based on certainty of fair value calculations.

INVESTOPEDIA EXPLAINS 'Level 2 Assets'

An example of a Level 2 asset is an interest rate swap, where the asset value can be determined based on the observed values for underlying interest rates and market-determined risk premiums.

The classification system including Level 1, Level 2 and Level 3 assets came about as a result of Financial Accounting Standards Board (FASB) Statement 157, which requires public companies to allocate all assets based on the reliability of fair market values. Level 2 assets are the middle classification based on how reliably their fair market values can be calculated. Level 1 assets are the easiest (such as listed stocks, bonds), while Level 3 assets can only be valued based on internal models or "guesstimates" and have no observable market prices.

RELATED TERMS
  1. Level 1 Assets

    Assets that have readily observable prices, and therefore a reliable ...
  2. Financial Accounting Standards ...

    A seven-member independent board consisting of accounting professionals ...
  3. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  4. Level 3 Assets

    Assets whose fair value cannot be determined by using observable ...
  5. Mark To Market - MTM

    1. A measure of the fair value of accounts that can change over ...
  6. FASB 157

    A Financial Accounting Standards Board (FASB) Statement that ...
RELATED FAQS
  1. What is happening during a risk repricing?

    During a strong bull market, the market's overall sense of optimism can often lead to poor estimates about the level of risk ... Read Full Answer >>
  2. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Full Answer >>
  3. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  4. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>
  5. What can working capital turnover ratios tell a trader?

    A company's working capital turnover ratio is traditionally positively correlated with business performance. A high, or better ... Read Full Answer >>
  6. What is a negative write-off?

    A negative write-off is a write-off conducted by a company or accountant after deciding not to pay back an individual or ... Read Full Answer >>
Related Articles
  1. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  2. Mutual Funds & ETFs

    Who Is To Blame For The Subprime Crisis?

    From lenders to buyers to hedge funds, it appears everyone has blood on their hands.
  3. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  4. Stock Analysis

    Southwest & Cheap Oil: The Perfect Combination?

    Discover how falling oil prices (and well-timed futures contracts) benefit Southwest Airlines.
  5. Fundamental Analysis

    Explaining the Common Size Income Statement

    A common size income statement expresses each account as a percentage of net sales.
  6. Professionals

    What Does an Auditor Do?

    An auditor ensures that organizations maintain accurate and honest financial records.
  7. Fundamental Analysis

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
  8. Economics

    How Does an Operating Lease Work?

    Operating lease is a term used mostly in accounting to denote a lease that gives the lessee rights to use and operate an asset without ownership.
  9. Economics

    As Fed Prepares To Move, Gold Is Losing Its Luster

    Last week’s Semi-Annual Monetary Policy Report to Congress returned investors’ focus back to the fundamentals, and a general upbeat of the economy.
  10. Economics

    Understanding Historical Cost

    Historical cost equals the original purchase price of an asset recorded on a company’s balance sheet.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!