Final answer:
To assess an entity's liquidity, an analyst would primarily use the Balance Sheet because it shows current assets which are impactful for liquidity. Money listed as assets may not be in the bank due to the fractional reserve banking system. The value ascribed to loans in the secondary market varies depending on the borrower's reliability and the current interest rate environment.
Step-by-step explanation:
In analyzing an entity's annual financial report, an analyst would primarily use the Balance Sheet to assess the entity's liquidity. The Balance Sheet provides a snapshot of the company's financial position at a specific point in time and includes assets, liabilities, and shareholders' equity. Current assets, such as cash, marketable securities, accounts receivable, and inventory, are particularly important for evaluating liquidity, as they can be quickly converted into cash to meet short-term obligations.
Regarding the money listed under assets on a bank balance sheet, it may not actually be in the bank because banks operate under the fractional reserve banking system, where only a portion of the bank's deposits are kept in reserve and the rest is used for loans and other investments. Consequently, much of the money recorded as assets is actually distributed as various types of loans.
When buying loans in the secondary market, an analyst might be willing to pay:
- Less for a loan if the borrower has been late on loan payments due to higher risk of default.
- Less for a loan if interest rates have risen, as the existing loan's lower rate becomes less attractive.
- More for a loan if the borrower is a firm with high profits, signaling lower risk and higher reliability of repayment.
- More for a loan if interest rates have fallen, making the loan's existing higher rate more valuable.