The local Credit Union is planning the allocation of funds for the coming year.
ID: 2723629 • Letter: T
Question
The local Credit Union is planning the allocation of funds for the coming year. The credit union makes four types of loans and has three additional investment instruments. Each loan/investment has a corresponding risk and liquidity factor (on a scale of 0-100, with 100 being the most risky/liquid). The various revenue-producing instruments are summarized in the table below: Instrument Annual Rate of Return (%) Risk Factor Liquidity Factor Automobile loans 8 50 0 Furniture loans 10 60 0 Other secured loans 11 70 0 Unsecured loans 14 80 0 Risk-free securities 5 0 100 Corporate stock fund 9 60 90 Corporate bond fund 8 50 80 There is $2,000,000 available for investment during the coming year. However, state laws and pesky stakeholders impose certain restrictions on choice of investment instruments. Risk-free securities may not exceed 30% of total funds available for investment. Unsecured loans may not exceed 10% of total funds invested in loans. The funds invested in automobile loans must not be less than the total of funds invested in furniture and other secured loans. The average risk factor may not exceed 60, and the average liquidity factor must be at least 40. Check all that apply. a. We are required to invest a total of $2,000,000. b. There are 7 decision variables. c. There are 6 constraints (not including nonnegativity). d. 0 is a right hand side value. e. 60,000 is a right hand side value. f. The average risk factor is (50 + 60 + 70 + 80 + 0 + 60 + 50)/7.
Explanation / Answer
Considering all the decision variables the investment portfolio for Local credit Union is as follows :
Now, lets see how this matches up with the investment constraints.
- Risk-free securities may not exceed 30% of total funds available for investment - 30 % of 2,000,000.00 i.e, 600,000.
- Unsecured loans may not exceed 10% of total funds invested in loans - Total fund invested in loans = 1100,000. Therefore ,maximum allowable investment in unsecured loan is $ 110,000 . Actual investment is $ 60,000 which is within the permissible limit.
- funds invested in automobile loans must not be less than the total of funds invested in furniture and other secured loans - Total funds invested in furniture & other secured loans = $ 490,000 , which is less than amount in automobile loan which is $ 550,000.
-Average risk factor not to exceed 60 , and average liquidity factor must be atleast 40.
Investment type Instruement Annual rate of return % Risk Factor Liquidity Factor Amt to be invested $ Automobile loans 8 50 0 550,000.00 Furniture loans 10 60 0 430,000.00 Other secured loans 11 70 0 60,000.00 Unsecured Loans 14 80 0 60,000.00 Risk free securities 5 0 100 600,000.00 Corporate stock fund 9 60 90 150,000.00 Corporate bond fund 8 50 80 150,000.00 Total Investment 2,000,000.00Related Questions
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