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. Level 2 Assets

    Assets that do not have regular market pricing, but whose fair ...
  2. Level 1 Assets

    Assets that have readily observable prices, and therefore a reliable ...
  3. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  4. Credit Crunch

    An economic condition in which investment capital is difficult ...
  5. Mark To Market - MTM

    1. A measure of the fair value of accounts that can change over ...
  6. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
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 >>
Related Articles
  1. Investing Basics

    The Importance Of Corporate Transparency

    Clear and honest financial statements not only reflect value, they also help ensure it.
  2. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  3. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  4. Stock Analysis

    Freeport-McMoRan Is Seeking A Helping Hand

    Freeport-McMoRan doesn't have the cash to invest in its planned oil and gas developments, which is forcing it to look for help in funding these projects.
  5. Fundamental Analysis

    What's Fair Value?

    Fair value has three different meanings depending on the context.
  6. Investing

    Understanding Accumulated Depreciation

    Depreciation is a rough approximation, in dollar terms, of the wear and tear on an asset. So the accumulated depreciation is the aggregate of the wear and tear on the asset from all prior time ...
  7. Stock Analysis

    Chesapeake Energy Sees History Repeating Itself

    Chesapeake was on the wrong side of natural gas when its price plunged in 2012, and it appears to be repeating itself after the price of oil plummeted.
  8. Investing Basics

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  9. Investing

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
  10. Investing

    What's MAGI?

    Modified adjusted gross income, or MAGI, is one aspect of a person’s income that is calculated while preparing a tax return.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center