(a). The management of the Raphael Bank is debating on the proper capital structure of the bank. A few of the senior staff suggest that it is better to increase the liabilities by increasing borrowed funds, while another group of staff suggest that it is better to increase the shareholders equity. Explain three major differences between the two sources of fund from the perspective of the bank.

(b). What are the pros and cons for having a capital structure with extremely high level of liabilities but only a small amount of shareholders equity?

(c). Raphael Bank has two loans, the first one is a commercial loan and the other one is a consumer loan. The commercial loan has a value of $3253680, and its annual spread between loan rate and cost of funds is 2.8%, annual fees are 2.5%, loss given default is 18%, and expected default frequency is 12%. The consumer loan has a value of $ 4389833, and its annual spread between loan rate and cost of funds is 2.3%, annual fees are 2.22%, loss given default is 34%, and expected default frequency is 13%. The correlation coefficient between the two loans is -0.182. Find the portfolio return (%) and portfolio standard deviation (%) by using Moodys KMV Portfolio Manager Model and Modern Portfolio Theory