During the last year you have had a loan commitment from your bank to fund working capital for your business. The total line available was $10,000,000, of which you took down $7,800,000. It is now the end of the loan commitment period and your bank had you pay the back-end fees. You have misplaced the paperwork that listed the terms of the commitment, but you know you paid total fees (this does not include any interest paid to borrow the $7,800,000) of $51,200 on this loan commitment. You remember that the back-end fee was 112 basis points. Calculate the front-end fee on this loan commitment.
A) 31 basis points
B) 27 basis points
C) 25 basis points
D) 23 basis points

Question

Quizplus · Accepted Answer

The total fees paid were $51,200. The back-end fee, which is 112 basis points (1.12%) of the amount taken down ($7,800,000), amounts to $7,800,000 * 1.12% = $87,360. Subtracting this from the total fees gives the amount paid in front-end fees: $51,200 - $87,360 = -$36,160. This negative result indicates a mistake in calculation. Correctly, the back-end fee calculation should be based on the total line available, not the amount taken down. Thus, the correct back-end fee calculation is $10,000,000 * 1.12% = $112,000. However, the error in the initial explanation suggests a misunderstanding of the question or a miscalculation. The correct approach to find the front-end fee involves knowing the correct basis for the back-end fee calculation and accurately subtracting it from the total fees to find the front-end fees, then calculating the front-end fee percentage based on the total line of credit or the amount taken down as specified in the question. Without the correct basis for the back-end fee calculation, the explanation provided is incorrect. The correct calculation should involve accurately determining the back-end fee based on the information given (either on the total line available or the amount taken down), subtracting this from the total fees to find the front-end fee amount, and then calculating the front-end fee percentage. Since the initial explanation led to a mistake, let's correct the approach:Given:- Total fees = $51,200- Back-end fee = 112 basis points of $10,000,000 (the total line available)- Amount taken down = $7,800,000First, calculate the back-end fee:Back-end fee = 112 basis points of $10,000,000 = 0.0112 * $10,000,000 = $112,000.This calculation is incorrect because the total fees paid ($51,200) cannot be less than the calculated back-end fee ($112,000) based on the total line of credit. The mistake lies in the misinterpretation of the back-end fee calculation or the total fees. The correct approach should involve recalculating the fees based on the correct interpretation of the question's details. Let's correct the explanation:The correct calculation of the back-end fee should directly relate to the details provided in the question. If the back-end fee is indeed based on the amount taken down or the total line of credit, the calculation should reflect that accurately, and the total fees should include both front-end and back-end fees. Without accurate details on the fee structure (e.g., whether the back-end fee applies to the total line of credit or the amount taken down), it's challenging to provide a corrected explanation. The focus should be on accurately interpreting the fee structure and recalculating the fees accordingly.

During the Last Year You Have Had a Loan Commitment