More on balance sheets (2): Collateral and revaluation
More on balance sheets from Sal Khan.
Here, Sal expands on the balance sheet from the previous episode where he bought a $1 million house with $250k cash and a $750k loan from a bank.
Assets = Liabilities + Equity
$1M = $750k + $250k
He expands a bit on the balance sheet with a quick overview of how loans work, introducing the terms ‘collateral,’ ‘revaluation,’ and ‘marking to market’ into the conversation.
Collateral is what we tell the bank they can keep if we do not pay our debt to them.
Revaluation, or marking to market, is assigning a new value to an asset (marking) if the real world (the market) dictates it.
Every so often, in order to be honest with ourselves, we need to revalue our assets, and rebalance our balance sheet.
- If the value goes down, then equity must go down because liabilities must stay the same.
- If the value goes up, then equity goes up because the liabilities must stay the same.
Liabilities have nothing to do with market value except in securing the loan and convincing the bank that the house is sufficient collateral.
This video comes from www.khanacademy.org