You have approached your local bank for a start-up loan commitment for $5,000,000 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 = $5,000,000, term = one year, up-front fee = 30 basis points, back-end fee = 40 basis points, and rate on the loan = 8 percent. If you immediately take down $1,000,000 and no more during the year, what is the total interest and fees you have paid on this loan commitment?
A) $150,000
B) $111,000
C) $87,000
D) $80,000

Question

Quizplus · Accepted Answer

The total interest and fees paid on the loan commitment can be calculated as follows:1. Up-front fee = 30 basis points on $5,000,000 = 0.30% of $5,000,000 = $15,0002. Back-end fee = 40 basis points on the undrawn portion of the loan = 0.40% of ($5,000,000 - $1,000,000) = $16,0003. Interest on the loan = 8% of $1,000,000 = $80,000Total = Up-front fee + Back-end fee + Interest = $15,000 + $16,000 + $80,000 = $111,000

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