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Financial planning A bank makes four kinds of loans to its personal customer These loans yield the following annual int3 Financial planning A bank makes four kinds of loans to its personal

3. Financial planning: A bank makes four kinds of loans to its personal customers. These loans yield the following annual int

3. Financial planning: A bank makes four kinds of loans to its personal customers. These loans yield the following annual interest rates to the bank: • First mortgage 15% Second mortgage 20% • Home improvement 20% • Personal overdraft 10% The bank has a maximum foreseeable lending capability of $350 million and is further con- strained by the following policies: 1. first mortgages must be at least 55% of all mortgages issued and at least 25% of all loans issued in $ terms) 2. second mortgages cannot exceed 25% of all loans issued (in $ terms) 3. to avoid public displeasure and the introduction of a new windfall tax the average interest rate on all loans must not exceed 16%. Formulate the bank's loan problem as an LP problem so as to maximize interest income while satisfying the policy limitations. Note here that these policy conditions, while potentially limiting the profit that the bank can make, also limit its exposure to risk in a particular area. It is a fundamental principle of risk reduction that risk is reduced by spreading money (appropriately) across different areas.

Feb 08 2020 View more View Less

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