Level 3 Assets

AAA

DEFINITION of 'Level 3 Assets'

Assets whose fair value cannot be determined by using observable measures, such as market prices or models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. In addition to Level 1 and Level 2 assets (both of which have more accurate fair values), Level 3 assets must be reported on by all publicly traded companies as of 2008.

INVESTOPEDIA EXPLAINS 'Level 3 Assets'

This classification system came about as a result of FASB Statement 157, which aims to bring clarity to the balance sheet assets of corporations. Even though they are hard to value, Level 3 assets are held at large investment shops and commercial banks by the billions.

These assets received heavy scrutiny during the credit crunch of 2007, as many Level 3 assets consist of mortgage-backed securities (which suffered massive defaults and write-downs in value). The firms that owned them were often not adjusting asset values downward even though credit markets had dried up in the market for asset-backed securities, and all signs pointed to a decrease in fair value.

RELATED TERMS
  1. Credit Crunch

    An economic condition in which investment capital is difficult ...
  2. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
  3. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  4. Mark To Market - MTM

    1. A measure of the fair value of accounts that can change over ...
  5. Level 1 Assets

    Assets that have readily observable prices, and therefore a reliable ...
  6. Level 2 Assets

    Assets that do not have regular market pricing, but whose fair ...
Related Articles
  1. The Importance Of Corporate Transparency
    Investing Basics

    The Importance Of Corporate Transparency

  2. Off-Balance-Sheet Entities: An Introduction
    Investing

    Off-Balance-Sheet Entities: An Introduction

  3. The Fuel That Fed The Subprime Meltdown
    Personal Finance

    The Fuel That Fed The Subprime Meltdown

  4. What is happening during a risk repricing?
    Investing

    What is happening during a risk repricing?

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center