Final answer:
The difference when an acquiring company pays less than the fair value of identifiable assets less liabilities is known as negative goodwill. The assets on a bank balance sheet may not actually be present in the bank due to fractional reserve banking. The value you might pay for a loan in the secondary market depends on factors like borrower reliability, changes in interest rates, and the borrower's financial condition.
Step-by-step explanation:
If an acquiring company pays less than the fair value of the identifiable assets less liabilities acquired, the difference is recorded as negative goodwill. Negative goodwill occurs in a business combination when the price paid for an acquisition is less than the fair value of its net tangible assets. In such cases, the difference is typically credited to the acquirer's income statement, resulting in a gain. It is important to note that negative goodwill is relatively rare and occurs under specific circumstances that may imply the acquired assets were purchased at a bargain price. This is the opposite of goodwill, which is an asset that represents the excess of the purchase price over the fair value of the assets acquired.
When analyzing a bank balance sheet, the money listed under assets may not actually be physically present in the bank because banks operate on a fractional reserve basis. This means that banks are only required to hold a fraction of their depositors' balances in reserve, allowing them to lend out the majority of deposited funds to other customers or invest them. This lending, investing, and the resulting creation of new financial instruments are part of what allows banks to generate income.
If you are buying loans in the secondary market, the price you would be willing to pay for a given loan may vary depending on various factors:
- The borrower has been late on a number of loan payments: This increases the risk of default and lowers the loan's value, leading you to pay less.
- Interest rates in the economy as a whole have risen since the bank made the loan: If the loan has a fixed interest rate lower than the current rates, it becomes less attractive, and you would pay less for it.
- The borrower is a firm that has just declared a high level of profits: This can indicate a lower risk of default and potentially improves the value of the loan, prompting you to pay more.
- Interest rates in the economy as a whole have fallen since the bank made the loan: If the loan has a fixed rate higher than current rates, it could be more attractive, and you might pay more for it.