An asset that is subject to indebtedness (recourse liability) that exceed its fair market value (FMV). It is an asset whose market value is below its book value. Such assets, said to be lower quality assets, are usually shown on balance sheet at book value, while the owner expecting its to appreciate in value in the future (this is in order to avoid the recognition of embedded losses- i.e., the different between book value and market value). At times, underwater assets are liquidated (sold to a third party) to the effect that their risk (usually interest rate risk for assets such as bonds, CDOs, etc.) is transferred.
August 21, 2024
