Final answer:
The payment of a liability decreases both assets and liabilities on the balance sheet. Money listed as assets in a bank may not be present due to loans and investments made by the bank. In the secondary market, the value of a loan can fluctuate based on borrower reliability and economic interest rates.
Step-by-step explanation:
The payment of a liability decreases both assets and liabilities on a company's balance sheet. When a liability, such as a loan or a mortgage, is paid off, the amount of the liability decreases, indicating that the company owes less. Simultaneously, company assets are reduced because cash or another form of asset is used to settle the obligation.
Regarding the bank balance sheet, the money listed under assets may not actually be in the bank because a bank typically uses customer deposits to create loans and other investments. Banks operate on the basis of fractional reserve banking, keeping only a fraction of the total deposits as reserves, either as vault cash or with the central bank, and using the rest for lending purposes or buying other financial instruments.
In the context of the secondary market, the price one might be willing to pay for a loan is affected by various factors:
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- If a borrower has been late on a number of payments, a loan buyer might pay less for that loan because it represents a higher risk of default.
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- If interest rates have risen since the loan was issued, the old loan may be less attractive because it generates lower interest income compared to new loans at higher rates; hence, its price would be lower.
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- Conversely, if the borrower is a firm that has recently declared high profits, the loan could be seen as lower risk, potentially increasing its value.
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- If interest rates have fallen since the loan was made, the existing loan has a higher interest rate and may be more attractive, leading a buyer to pay more for it.