Rates of Return for Financial Planning Problem Type of Loan or Security Annual Rate of Return (%) Home mortgage (first) 6 Home mortgage (second) 8 Commercial loan 11 Automobile loan 9 Home improvement loan 10 Risk-free securities 4 . to diversify its portfolio. In addition. The loans and the risk-free securities with their annual rate of return are given below.FINANCIAL PLANNING First American Bank issues five types of loans. the bank invests in risk-free securities. and to minimize risk.

Commercial loans cannot exceed 50 percent of the total funds invested in mortgage loans.000. and regulations: 1. 6. . Home improvement loans cannot exceed $8. Home improvement loans cannot exceed 40 percent of the funds invested in first mortgage loans. 3. 5. The bank has $90 million in available funds. The` investment in first mortgage loans must be at least twice as much as the investment in second mortgage loans. restrictions. 8. The investment in mortgage loans must be at least 60 percent of all the funds invested in loans. 7. 4.000. Risk-free securities must contain at least 10 percent of the total funds available for investments. 2. Automobile loans and home improvement loans together may not exceed the commercial loans.FINANCIAL PLANNING (CONTINUDED) The bank’s objective is to maximize the annual rate of return on investments subject to the following policies.


2x2 >= 0 ( 1st and 2nd mortgage loan constraint) 6) x5 – 0.SUBJECT TO THE FOLLOWING CONSTRAINTS1) x1 + x2 + x3 + x4 + x5 + x6 = 90.000 (risk free securities constraint) 3) x5 <= (budget constraint) 2) x6 >= 9. x3 .0.0.40x1 <= 0 (home improvement loans and 1st mortgage loans constraint) 7) x4 + x5 – x3 <= 0 (automobile loans.000.40x2 . x2 . x5 .50x2 <= 0 (commercial loans and mortgage loans) 9) x1 . x4 . home improvement loans and all commercial loans 8) x3 .60x4 .60x3 .0.000 (home improvement loans constraint) 4) 0.40x1 + 0. x6 >= 0 (non-negativity constraint) .60x5 >= 0 (mortgage constraint) 5) x1 .50x1 .

000 (dollars invested in automobile loans) x5 = 8.000) .200.000.INTERPRETATION x1 = 32.000 (profit over the investment of $90.000 (dollars invested in home improvement loans) x6 = 9.000 (dollars invested in the 1st home mortgage loans) x2 = 16.400.082.000 (dollars invested in commercial loans) x4 = 1.000 (dollars invested in the 2nd home mortgage loans) x3 = 24.000.000 (dollars invested in risk free securities) Z = $


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