A firm has a committed line of credit with a maximum of $1.2 million and an interest rate of 12% (EAR) with a certain bank. The commitment fee is 0.6% (EAR). The firm borrows $500,000 at the start of the year and then repays it at the end of the year. What is the total cost of the loan?
A) $60,000
B) $64,200
C) $76,300
D) $95,000

Question

Quizplus · Accepted Answer

B) Interest on borrowed funds = 0.12 × (500,000) = $60,000
Commitment fee paid on unused portion = 0.006 × (700,000) = $4,200
Total cost of loan = $64,200

A Firm Has a Committed Line of Credit with a Maximum