Level 2 Assets

Level 2 assets are financial assets that do not have regular market pricing, but whose fair value can be 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. Publicly traded companies are required to report to investors the make-up of their financial assets based on the 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.

Level 2 assets are commonly held by private equity firms, insurance companies and other financial institutions that have investment arms. The Blackstone Group L.P., a prime example, breaks down its Level 2 assets in the firm's 10-K and 10-Q filings for shareholders. For these Level 2 assets, the firm discloses that "fair value is determined through the use of models or other valuation methodologies. Financial instruments which are generally included in this category include corporate bonds and loans, including corporate bonds and loans held within CLO vehicles, government and agency securities, less liquid and restricted equity securities, and certain over-the-counter derivatives where the fair value is based on observable inputs. Senior and subordinated notes issued by CLO vehicles are classified within Level II of the fair value hierarchy."