12-25 If the amount lost per dollar on a defaulted loan is 40 percent,then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital)to

Question

Quizplus · Accepted Answer

If the amount lost per dollar on a defaulted loan is 40 percent, the bank will lose $0.40 for every $1.00 in defaulted loans. To prevent a loss that exceeds 10 percent of its bank capital, the bank should limit its concentration of defaulted loans to $0.10 of loss per $1.00 of capital.

Setting up the equation:

$0.40X = $0.10 
X = $0.25

Therefore, the concentration limit (as a percentage of capital) should be 25%, which is answer choice C.

12-25 If the Amount Lost Per Dollar on a Defaulted