Final answer:
The money on a bank balance sheet may not be physically present as banks lend out most of the deposited funds. In the secondary loan market, buyers assess risk and interest rates to determine the price they are willing to pay for a loan.
Step-by-step explanation:
The money listed under assets on a bank balance sheet may represent various forms of assets, including cash, securities, loans, and other financial instruments. However, not all of it may be physically present in the bank because banks operate on a fractional reserve basis, which means they only keep a fraction of their depositors' money in reserve and lend out the rest. The money is thus often tied up in loans, investments, or other assets that are not immediately liquid.
When buying loans in the secondary market, a buyer would consider several factors:
- If a borrower has been late on loan payments, the loan is riskier, so a buyer would pay less.
- If interest rates have risen since the loan was made, the older loan at a lower rate is less attractive, so a buyer would pay less.
- If a borrower firm has declared high profits, it indicates better loan repayment capacity, increasing the loan's value, so a buyer would pay more.
- If interest rates have fallen since the loan was made, the loan is more attractive because it has a higher rate compared to new loans, so a buyer would pay more.