Final answer:
Disclosed intercompany or holding company transactions are not a concern when reviewing financial statements for loan requests. However, unexplained items, unclear fund distributions, and missing footnotes are red flags. Loan values in the secondary market are influenced by the borrower's payment history and changes in economic interest rates. The correct option is b. Intercompany, or holding company transactions that are disclosed
Step-by-step explanation:
Understanding Financial Statement Red Flags and Loan Valuation
When reviewing a borrowing request for a private banking client and their business, intercompany or holding company transactions that are disclosed are not a cause for concern. These transactions are part of ordinary business practices and their disclosure enhances transparency.
However, unexplained unusual items or exceptions on the financial statements, unclear funds distribution or expenses on the balance sheet and income statement, and the absence of footnotes to explain larger account balances or significant changes compared to previous periods are all red flags indicating potential financial inaccuracy or manipulation.
In terms of loan valuation in the secondary market, a loan's value can fluctuate based on several factors. If a borrower has been late on loan payments, the loan becomes less valuable due to the increased risk of default.
Conversely, if the borrower is a firm that has just declared a high level of profits, the loan value may increase due to enhanced repayment capacity. Interest rate fluctuations in the economy also affect loan value; if rates have risen since the loan was issued, it may be worth less, while falling rates could increase the loan's value. The correct option is b. Intercompany, or holding company transactions that are disclosed