Calculating Fees on a Loan Commitment You have approached your local bank for a start-up loan commitment for $1,000,000 needed to open an auto repair store.You have requested that the term of the loan be one year.Your bank has offered you the following terms: size of loan commitment = $1,000,000,term = one year,up-front fee = 20 basis points,back-end fee = 50 basis points.If you take down 90 percent of the total loan commitment,calculate the total fees you have paid on this loan commitment.
A)$2,000
B)$2,500
C)$5,000
D)$6,500

Question

Quizplus · Accepted Answer

To calculate the fees, we need to find out the following:

1. Up-front fee: 
20 basis points on $1,000,000 = $1,000,000 x 0.002 = $2,000

2. Back-end fee: 
50 basis points on $1,000,000 = $1,000,000 x 0.005 = $5,000

3. Amount taken down: 
90% of $1,000,000 = $900,000

4. Total fees paid:
Up-front fee + (back-end fee x amount taken down) = $2,000 + ($5,000 x $900,000) = $2,000 + $4,500 = $6,500

Therefore, the total fees paid on this loan commitment are $6,500. The best choice is B.

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