Reference no: EM132297271
The upper management of a bank has set the following bank loan policy for the next year. The maximum budget allocated for loans is set to $200 million. The company offers the following type of loans: Personal, Car, Home, Farm, Commercial. The bank has decided to set the following interest rates for each type of loan: Personal (15%), Car (14%), Home (13%), Farm(12%), Commercial (11%). The risk management unit of the bank has identified the following loan risk for each type of loan based on historical records in the area: Personal (12%), Car (8%), Home (5%), Farm (4%), and Commercial (3%). The company in order to limit the exposure to bad loans, the company has set up a limit of 5% on the ratio of the bad loans to all loans provided by the bank. In addition, the upper management has set the following additional constraints: 1) Allocate at least 40% of the loan budget to fund the Farmers and Commercial Businesses, 2) The home loans must be at least 60% of the Personal, Car and Home loans.
Set up the problem as an LP:
Step 1: Define the variables:
Step 2: Define the Objective Function (Not straight forward – needs some thinking)
Step 3: Define the Constraints
LP formulation: