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

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?

Quizplus · Accepted Answer

Concentration limit = Maximum loss as a percent of capital x (1÷ Loss rate)
For unsecured loans the loss rate is 100%
 CL = 0.20 F1F1F1S1F1F1F10 (1 F1F1F1S1F1F1F10 1.0)= 0.20.

Kansas Bank Has a Policy of Limiting Their Loans to Any