The Thriftem Bank, a full service facility, is in process of formulating a loan policy involving a maximum of $12 million. The following table provides a pertinent data about the different types of loans the bank deals with:
Type of loan Interest Rate Probability of bad debt
Personal 0.140 0.10
Car 0.130 0.07
Home 0.120 0.03
Farm 0.125 0.05
Commercial 0.100 0.02
Bad debts are unrecoverable and hence produce no interest revenue.
Competition with other financial institutions in the area requires the bank to allocate at least 40% of the funds to farm and commercial loans. To assist the housing industry in the region, home loans must equal at least 50% of the personal, car and home loans. The bank also has stated a policy specifying that the overall ratio for bad debts on all loans may not exceed 0.04. Formulate the above described bank loan policy to maximize its net return (Revenue from the interest - lost funds from bad debts).