Regina 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

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The concentration limit for unsecured loans is determined by the maximum loss as a percent of capital, which is given to be 20 percent. Therefore, the maximum amount of unsecured loans that can be made is 20 percent of the bank's capital. Since this is the maximum limit, the concentration limit for unsecured loans made by Kansas Bank must also be 20 percent of its capital. Therefore, the best choice is D, 20 percent.

Regina Bank Has a Policy of Limiting Their Loans to Any