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

Question

Quizplus · Accepted Answer

According to the given information, the 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.

For secured loans, it is expected that 40 percent of interest and principal will be collected. This means that if a secured loan defaults, the bank will be able to recover 40 percent of the loan amount. Therefore, the maximum loss on a secured loan will be 60 percent (100% - 40%).

To ensure that the maximum loss on secured loans does not exceed 20 percent of capital, the concentration limit for secured loans can be calculated as follows:

Concentration limit = 20% / 60% = 0.33 or 33%

Therefore, the concentration limit for secured loans made by this bank is 33 percent, which is option C.

Kansas Bank Has a Policy of Limiting Their Loans to Any