Lazaretto National Savings & Loans makes five types of loans. These loans with the yearly interest rate charged to customers, are shown in the table below: Type of Loan Interest Charged (%) Commercial loans 15 First home mortgage 10 Home improvements 13.6 Second home mortgages 14 Short-term revolving loan 18 The bank has $53 million in available funds. Its objective is to maximise the yield on investment. The Demand for Funds The demand for short-term revolving loans never exceeds $5 million. All other demands are unlimited. Page 3 of 3 Policies and Regulations 1. Home improvement loans cannot be higher than 20 percent of the first home mortgage. 2. Commercial loans must be smaller than or equal to the second home mortgage loans. 3. The bank must invest at least 60 percent of the loans outstanding (total loans) in mortgages. 4. For safety reasons, there must be at least $2 invested in first home mortgage loans for every dollar invested in second home mortgage loans. 5. Short-term loans cannot exceed $5 million. Formulate the best bank fund allocation plan.
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