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.

Question

Quizplus · Accepted Answer

The total fees consist of the up-front fee and the back-end fee on the amount taken down. The up-front fee is 20 basis points (0.20%) of the total commitment, which is $1,000,000 * 0.002 = $2,000. The back-end fee is 50 basis points (0.50%) on the amount taken down, which is 90% of $1,000,000 = $900,000 * 0.005 = $4,500. The total fees paid are $2,000 (up-front) + $4,500 (back-end) = $6,500.

You Have Approached Your Local Bank for a Start-Up Loan