what is a level 2 asset 
level 2 assets are financial assets and liabilities that are difficult to value and can be determined based on other data values or market prices however these assets don t have regular market pricing level 2 asset values are sometimes called mark to model assets they can be closely approximated using simple models and extrapolation methods these methods use known observable prices as parameters level 2 assets stand in contrast to level 1 assets which are liquid and easy to value based on market prices understanding level 2 assetspublicly traded companies are obligated to establish fair values for the assets they carry on their books investors rely on these fair value estimates to analyze the firm s current condition and future prospects according to generally accepted accounting principles gaap certain assets must be recorded at their current value not historical cost publicly traded companies must also classify all their assets based on the ease with which they can be valued in compliance with the accounting standard financial accounting standards board fasb 157 three asset levels were introduced by the fasb to bring clarity to corporations balance sheets level 2 assets are the middle classification based on how reliably their fair market value can be calculated level 1 assets such as stocks and bonds are the easiest to value level 3 assets can only be valued based on internal models or guesstimates they 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 level 2 assets must be valued using market data obtained from external independent sources the data used can include quoted prices for similar assets and liabilities in active markets prices for identical or similar assets and liabilities in inactive markets or models with observable inputs these include default rates interest rates and yield curves an interest rate swap is an example of a level 2 asset the asset value can be determined based on the observed values for underlying interest rates and market determined risk premiums example of a level 2 assetblackstone inc breaks down its level 2 assets in the firm s 10 k and 10 q filings for shareholders the asset manager disclosed the following information in the filings fair value is determined through the use of models or other valuation methodologies financial instruments that 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 1observable vs unobservable inputsinvestors and analysts sometimes struggle to identify the difference between level 2 and level 3 assets the difference is important however particularly because gaap requires additional disclosures for level 3 assets and liabilities whether an asset or liability is level 2 or level 3 is dependent on the valuation inputs and whether the market data that s used is available to the public this brings a few questions to the forefront the input may be considered unobservable if the answer to any of these questions is no level 3 is the fair value hierarchy as a result 2