Which scenario is most likely measured at Level 3 fair value?

• A. A government bond with an active market.
• B. An instrument priced using quoted prices in markets.
• C. An equity investment with observable inputs other than active markets.
• D. A private company equity investment with no observable inputs.

Answer: (D)

In fair value measurements, the level of the hierarchy reflects how observable the inputs are. Level 3 uses unobservable inputs, meaning there’s no reliable market data to base the value on and values must rely on internal models and management assumptions. A private company equity investment with no observable inputs fits this scenario best because there aren’t market quotes or third-party data you can use to corroborate a fair value directly; you’d be building a valuation from internal projections, discount rates, and other estimates.

The other scenarios rely on observable prices or data. A government bond with an active market has readily available quoted prices for identical assets, so it sits at Level 1. An instrument priced using quoted prices in markets also points to Level 1 if those quotes come from active markets. An equity investment with observable inputs other than active markets uses observable data but not direct quotes for identical assets, placing it in Level 2.