Final answer:
Assets listed on a bank balance sheet may not be present in the bank due to asset-liability time mismatches and fractional reserve banking. The valuation of loans in the secondary market depends on the borrower's creditworthiness, changes in interest rates, and borrower's profitability.
Step-by-step explanation:
The money listed under assets on a bank balance sheet may not actually be physically present in the bank due to the asset-liability time mismatch. This means that while customers can withdraw the bank's liabilities in the short term, the bank's assets are often in the form of loans that are repaid over the long term.
Moreover, banks utilize fractional reserve banking, which allows them to lend out a portion of the deposits they receive, thereby keeping only a fraction of total deposits as reserves.
When buying loans in the secondary market, several factors influence the price one may be willing to pay. If:
- a. The borrower has been late on a number of loan payments, the loan is riskier, and one would likely pay less for it.
- b. Interest rates have risen since the loan was made, the old loan's lower interest rate is less attractive, thus one would pay less.
- c. The borrower is a firm with high profits, the loan is considered safer, and one may be willing to pay more for it.
- d. Interest rates have fallen since the loan was made, the existing loan has a relatively higher rate, making it more valuable, and one would pay more for it.