Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected.
-What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank?

Question

Quizplus · Accepted Answer

The concentration limit for unsecured loans is 20 percent of capital, as the policy states that the maximum loss should not exceed 20 percent of capital. Since unsecured loans are assumed to have no recovery, the entire loan amount is at risk, thus the limit is 20 percent.

Kansas Bank Has a Policy of Limiting Their Loans to Any