Reference no: EM133000988

John Richman is seeking a demand loan from his bank in the amount of $10,000. The loan period is to be one year. He has the following assets:

1. A house which has a present market value $220,000. The amount owing on the first mortgage is $66,000. There are no other mortgages. The title to the property is registered in the names of John and his wife.
2. C.P.R. shares with a present market value of $14,000.
3. A Life Insurance Policy with a cash surrender value of $15,000. The beneficiary of the policy is John's wife. She left John two months ago and is presently living in another city.
4. Canada Savings Bonds with a face value (not including accrued interest) of $10,000.
5. A new Mercedes automobile purchased last month for $64,000.
6. 49 shares in the private company of which John is the president. The only other share issued is held by his lawyer. The last balance sheet of the company showed owner's equity of $140,000

Problem 1: List, in order of priority, the best collateral the bank can take to cover the loan. Also, explain the reasons for this order you have selected.

Problem 2: Although, as yet, you have not covered consumer credit analysis, what does your intuition tell you about the risks the bank may be taking if it lends John the money even though collateral appears good?