Define: Toxic Asset

Business, Legal & Accounting Glossary

Definition: Toxic Asset



Advertisement



Full Definition of Toxic Asset


A toxic asset is any asset that has a current market value significantly below its book value. Further, the market for a toxic asset is very illiquid. It is virtually impossible to sell a toxic asset at a reasonable price, if at all. A toxic asset has a damaging impact on any company’s balance sheet. With many toxic assets on its books, a company can quickly become insolvent. Toxic asset was a term frequently used during the banking crisis of 2007-2009. In this case, the term toxic asset referred to collateralized debt obligations, credit default swaps, or mortgage-backed securities.

A mortgage-backed security became a toxic asset as a result of the following… First, with the sharp decrease in house prices underlying the mortgage-backed security, its value dropped dramatically. Second, the holder of this mortgage-backed security couldn’t find a buyer. Indeed, unless house prices went back to inflated high prices underlying most of those mortgage-backed securities, the purchaser of this toxic asset was guaranteed to lose money. A sharp decrease in value and illiquid trading markets are two key features of a toxic asset. Although the term toxic asset is often associated with assets tied to bad loans (i.e. toxic in nature), any asset can become a toxic asset in a price falling environment where demand dries up. When companies mark to market their assets, under certain economic conditions, a good asset can become a toxic asset.


Advertisement




Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/toxic-asset/
Modern Language Association (MLA):
Toxic Asset. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. April 08, 2020 https://payrollheaven.com/define/toxic-asset/.
Chicago Manual of Style (CMS):
Toxic Asset. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/toxic-asset/ (accessed: April 08, 2020).
American Psychological Association (APA):
Toxic Asset. PayrollHeaven.com. Retrieved April 08, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/toxic-asset/

Definition Sources


Definitions for Toxic Asset are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 5th February, 2020