CandleFocus Glossary Editor
Level 2 assets are financial instruments that are reported on the balance sheet of an investing institution or company and are not categorized under Level 1 assets. They are categorized and valued using “other observable market inputs” such as the price of related instruments or indices, as opposed to levels 1 and 3 assets that utilize quoted prices on active markets to generate their valuations.
Examples of level 2 assets include options, derivatives, bonds in illiquid markets and other various debt instruments, such as mortgage-backed securities and collateralized debt obligations.
Due to their complex structures, some level 2 assets can be more prone to significant pricing fluctuations, which can greatly increase a company’s risk exposure and financial losses in the event of a sharp market downturn. For that reason, it is important for companies to closely monitor the prices of level 2 assets and limit their exposure to them.
At the same time, these investments can also be a great way to generate higher returns, as level 2 assets can be priced more favorably than other forms of investments. This means that they may be attractive to investors who are looking to take on a higher level of risk in order to increase their potential returns.
Overall, level 2 assets are a type of investment that can be attractive to certain investors, but they require a greater degree of monitoring of pricing and credit risk, as the fair value of these assets can change quickly when markets move significantly in either direction. As such, careful consideration should be taken when evaluating any type of level 2 asset to ensure the proper level of risk is being taken on.
Examples of level 2 assets include options, derivatives, bonds in illiquid markets and other various debt instruments, such as mortgage-backed securities and collateralized debt obligations.
Due to their complex structures, some level 2 assets can be more prone to significant pricing fluctuations, which can greatly increase a company’s risk exposure and financial losses in the event of a sharp market downturn. For that reason, it is important for companies to closely monitor the prices of level 2 assets and limit their exposure to them.
At the same time, these investments can also be a great way to generate higher returns, as level 2 assets can be priced more favorably than other forms of investments. This means that they may be attractive to investors who are looking to take on a higher level of risk in order to increase their potential returns.
Overall, level 2 assets are a type of investment that can be attractive to certain investors, but they require a greater degree of monitoring of pricing and credit risk, as the fair value of these assets can change quickly when markets move significantly in either direction. As such, careful consideration should be taken when evaluating any type of level 2 asset to ensure the proper level of risk is being taken on.