Final answer:
AFS securities can be found on the balance sheet under assets. On a bank balance sheet, the money shown as assets may not be physically in the bank due to the fractional reserve banking system.
Step-by-step explanation:
Available-for-sale (AFS) securities can be found on the balance sheet under the assets section. AFS securities are a category of assets that can be sold in response to liquidity needs or changes in interest rates, exchange rates, or equity prices. These are different from held-to-maturity securities, which a company has the intent and ability to hold to maturity, and trading securities which are bought and held principally for the purpose of selling them in the near term.
Regarding the money listed under assets on a bank balance sheet, it may not be present physically in the bank because banks operate on a fractional reserve system, meaning they keep a fraction of deposits on hand as reserves and use the rest for loans or other investments. Banks earn income from interest on loans and other investments, which can exceed the cost of maintaining those reserves.
In the context of buying loans in the secondary market, the decision to pay more or less for a loan is influenced by various factors:
- If the borrower has been late on a number of loan payments, this indicates an increased risk of default, so the loan would be less valuable and you might pay less for it.
- Should the interest rates in the economy increase after the loan was given, the loan's fixed interest rate might be lower than current market rates, making it less attractive and thus, priced lower.
- If a borrowing firm has just declared a high level of profits, this can decrease the perceived risk of the loan, possibly leading to a willingness to pay more for the loan due to improved repayment prospects.
- Conversely, if the interest rates in the economy have fallen since the loan was made, the loan's interest rate now represents a higher return relative to the market, so it could be worth more.