Final answer:
A balance sheet helps to answer whether too much credit has been extended by showing financial figures like receivables. Money under assets on a bank's balance sheet might not be present as banks lend out deposits. The value of loans in the secondary market is influenced by borrowers' payment history, current interest rates, and the borrowers' profitability.
Step-by-step explanation:
Understanding a Balance Sheet
A balance sheet is a financial statement that provides a snapshot of a company's financial position, detailing its assets, liabilities, and shareholders' equity at a particular point in time. It can help answer questions related to the financial health and stability of a business. In particular, a balance sheet can help to answer whether too much credit has been extended (Option A) by showing the amount of receivables and comparing it to other financial figures, such as current assets and total liabilities.
Why Money on a Balance Sheet Might Not Be in the Bank
The money listed under assets on a bank's balance sheet may not actually be in the bank because the bank uses the deposits to make loans and investments, which are also listed as assets.
Factors Affecting the Value of Loans in the Secondary Market
- The borrower's payment history: You might pay less for a loan if the borrower has been late on loan payments, due to the higher risk of default.
- Current interest rates: If interest rates have risen since the loan was made, you might pay less for it, as the loan's rate may be less attractive compared to new loans. Conversely, if interest rates have fallen, the loan's fixed rate may be more attractive, and you'd be willing to pay more.
- Borrower's profitability: A firm that has declared high profits is considered less risky, increasing the value of the loan.