Final answer:
Unrealized gains and losses on held-to-maturity securities are not recognized and do not appear in financial statements. Money on a bank’s balance sheet typically reflects lent out funds due to the fractional reserve system. The willingness to pay for loans in the secondary market varies based on credit risk, interest rate changes, and the borrower's financial health.
Step-by-step explanation:
Unrealized gains and losses on held-to-maturity securities are not recognized because these securities are reported at their amortized cost. Companies hold these investments with the intent to hold them until a fixed maturity date and not for the purpose of selling them in the short-term. Therefore, any paper gains or losses that may occur because of market fluctuations are not realized or reported in financial statements until the security is sold or matures.
For a bank balance sheet, the money listed under assets may not be physically in the bank because banks operate on a fractional reserve system. This means that banks lend out most of the money they receive from depositors, keeping only a small fraction as reserves. As such, the cash represented on the balance sheet includes loans made to customers, which the bank expects to recover over time, in addition to the actual cash reserves held by the bank.
Regarding buying loans in the secondary market, your willingness to pay more or less for a given loan depends on various factors:
- Credit risk: You would pay less for a loan if the borrower has been consistently late on payments, indicating high credit risk.
- Interest rate fluctuations: You may pay less for a loan if interest rates have risen since the loan was originated, as the loan’s fixed interest payments are now less attractive. Conversely, you might pay more if interest rates have fallen, making the loan’s payments more valuable.
- Borrower's financial health: You would be willing to pay more for a loan if the borrower, especially a corporation, has declared high profits, which suggests lower credit risk and better repayment prospects.