Final answer:
All options listed are ways to underrecord liabilities. Money on a bank's balance sheet may not be physically present due to loans and investments. Loan values in the secondary market are influenced by the borrower's payment history, changing interest rates, and the borrower's financial health.
Step-by-step explanation:
Underrecording Liabilities and Buying Loans in the Secondary Market
Regarding the initial question, d. All of the above are ways to underrecord liabilities. Underrecording liabilities can be done by either not disclosing debt incurred, claiming that a debt has been forgiven without valid confirmation, or simply not recording the loans incurred appropriately.
Bank Balance Sheet Assets
The money listed under assets on a bank balance sheet might not actually be in the bank because it could be loaned out to other clients in the form of mortgages, personal loans, or used for other investment purposes, following the fractional-reserve banking system which only requires the bank to keep a fraction of its deposits on hand at any given time.
Buying Loans in the Secondary Market
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- The value to pay for a loan may be less if the borrower has been late on a number of loan payments due to the increase in credit risk.
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- If interest rates in the economy have risen since the bank made the loan, a buyer might pay less for the loan because it might yield a lower return compared to newer loans at higher rates.
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- A loan might be worth more if the borrower is a firm that has just declared a high level of profits, reducing credit risk and increasing confidence in repayment.
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- In case interest rates have fallen, the buyer might be willing to pay more for a loan as it could yield a higher return than newly originated loans at current lower rates.
Reassuring a Bank for a Loan
To reassure a bank when faced with imperfect information about repayment, a borrower could provide a strong credit history, secure a co-signer, offer collateral, or propose a larger down payment to reduce the risk to the lender.