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.
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.
Investment dictionary. Academic. 2012.
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