The employee credit union at State University is planning the allocation of fund

Question

The employee credit union at State University is planning the allocation of funds for the coming year. The credit union makes four types of loans to its members. In addition, the credit union invests in risk-free securities to stabilize income. The various revenue-producing investments together with annual rates of return are as follows:

The credit union will have $2.3 million available for investment during the coming year. State laws and credit union policies impose the following restrictions on the composition of the loans and investments:

• Risk-free securities may not exceed 30% of the total funds available for investment.

• Signature loans may not exceed 10% of the funds invested in all loans (automobile, furniture, other secured, and signature loans).

• Furniture loans plus other secured loans may not exceed the automobile loans.

• Other secured loans plus signature loans may not exceed the funds invested in risk-free securities.

How should the $2.3 million be allocated to each of the loan/investment alternatives to maximize total annual return?

Auto loans

Furniture loans

Other secured loans

Signature Loans

Risk-free securities

What is the projected total annual return?

Type of Loan/Investment Annual Rate of Return (%) Automobile loans 7 Furniture loans 10 Other secured loans 11 Signature loans 12 Risk-free securities 8

Explanation / Answer

Ans) Particulars Percentage of investment Rate of Return Weighted average return Auto loans 32 7 2.24 Furniture loans 9 10 0.90 Other secured loans 22 11 2.42 Signature Loans 7 12 0.84 Risk-free securities 30 8 2.40 100 8.80 What is the projected total annual return? Ans) The projecte total annual return is 8.80%

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