Final answer:
Banks require financial statements over cash flow projections as they provide a historical overview of financial health crucial for risk assessment. In the secondary market, loan values fluctuate based on the borrower's payment history, changes in economic interest rates, and the borrower's profit levels.
Step-by-step explanation:
Banks require financial statements during a loan application because these statements provide a comprehensive overview of a company's financial health, including its assets, liabilities, revenues, expenses, and equity. Financial statements offer a historical track record and insights into a company's management efficiency, creditworthiness, and potential for longevity, which are crucial for risk assessment. Cash flow projections are also important but they represent forecasts and can be seen as optimistic estimates rather than actual results. Banks use financial statements to evaluate the company's ability to service its debt and to assure the bank that the borrower will repay the loan.
In the secondary market, the value of loans is influenced by the risk profile of the loans and the economic environment. For instance, if a borrower has been late on loan payments, the risk of default is higher, hence the loan is worth less. If interest rates rise, existing loans at lower rates become less attractive, reducing their value. Conversely, if a borrower's financial situation improves, evidenced by high profits, the risk of default decreases, increasing the loan's worth. And if interest rates fall, existing loans with higher rates become more valuable.