A corporation is planning to issue $10 million worth of 180-day commercial paper.In order to reduce the interest rates by 25 basis points (per year), it plans to back this issue with a standby letter of credit or a loan commitment.The standby letter of credit is available for 20 basis points (per year) to be paid up-front.The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee. What are the savings to the corporation if it obtains a loan commitment to back its $10 million issue of commercial paper?
A)$1,250.
B)$2,500.
C)$3,750.
D)$5,000.
E)$6,250

Question

Quizplus · Accepted Answer

The savings can be calculated by first determining the cost of the loan commitment and then comparing it to the savings from the reduced interest rate. The loan commitment costs are an up-front fee of 15 basis points and a back-end fee of 5 basis points, totaling 20 basis points. Since the interest rate reduction is 25 basis points, the net savings are 5 basis points per year. For a $10 million issue over 180 days (half a year), the savings are $10,000,000 \times 0.05\% \times 0.5 = \$2,500$.

A Corporation Is Planning to Issue $10 Million Worth of 180-Day