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 % of capital) for secured loans made by this bank?

Question

Quizplus · Accepted Answer

To determine the concentration limit for secured loans, we need to use the formula:
Max Loss as % of Capital = (Amount of Loan x (1 - % Recovered)) / Capital
We can rearrange the formula to solve for the maximum amount of loan that can be made:
Amount of Loan = (Max Loss as % of Capital x Capital) / (1 - % Recovered)

For secured loans, % Recovered is 40% and Max Loss as % of Capital is 20%. Plugging in these values, we get:
Amount of Loan = (20% x Capital) / (1 - 40%)
Amount of Loan = (20% x Capital) / 0.6
Amount of Loan = 33.33% x Capital

Therefore, the concentration limit for secured loans is 33.33% of capital, which is closest to choice C (33%).

Regina Bank Has a Policy of Limiting Their Loans to Any