A firm has a committed line of credit with a maximum of $2.5 million and an interest rate of 9% (EAR) with a certain bank. The commitment fee is 0.65% (EAR). The firm borrows $2 million 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) $180,000
B) $183,250
C) $193,000
D) $212,500

Question

Quizplus · Accepted Answer

B) Interest on borrowed funds = 0.09 × ($2,000,000) = $180,000
Commitment fee paid on unused portion = 0.0065 × ($500,000) = $3,250
Total cost of loan = ($180,000 + $3,250) = $183,250

A Firm Has a Committed Line of Credit with a Maximum