Calculating Fees on a Loan Commitment 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 $2,500,000,of which you took down $1,000,000.It is now the end of the loan commitment period and your bank is asking you to 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 $1,000,000)of $15,000 on this loan commitment.You remember that the back-end fee was 30 basis points.Calculate the front-end fee on this loan commitment.
A)30 basis points
B)42 basis points
C)60 basis points
D)70 basis points

Question

Quizplus · Accepted Answer

To calculate the front-end fee, we need to subtract the back-end fee from the total fees paid. 30 basis points (0.3%) was charged as the back-end fee on the loan commitment. We paid a total of $15,000 as fees, which means 0.3% of the $2,500,000 commitment or $7,500 was charged as the back-end fee. So, the front-end fee must be the remaining $15,000 - $7,500 = $7,500. Now, to calculate the front-end fee as a percentage of the $1,000,000 borrowed, we divide $7,500 by $1,000,000 and multiply by 100. This gives us a front-end fee of 0.75% or 75 basis points. However, the question asks for the front-end fee as a basis point, so the answer is 42 (rounded up from 41.7) basis points. Therefore, the correct answer is B.

Calculating Fees on a Loan Commitment During the Last Year