You have approached your local bank for a start-up loan commitment for $1,000,000 needed to open a car 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, and rate on the loan = 9 percent. If you immediately take down $750,000 and no more during the year, what is the total interest and fees you have paid on this loan commitment?
A) $70,250
B) $70,750
C) $74,500
D) $93,250

Question

Quizplus · Accepted Answer

The total interest and fees paid on the loan commitment can be calculated as follows:1. Up-front fee = 20 basis points on $1,000,000 = 0.20% of $1,000,000 = $2,000.2. Back-end fee = 50 basis points on the unused portion of the loan = 0.50% of ($1,000,000 - $750,000) = $1,250.3. Interest on the loan = 9% of $750,000 = $67,500.Total interest and fees = $2,000 (up-front fee) + $1,250 (back-end fee) + $67,500 (interest) = $70,750.

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