Assume a bank makes a loan commitment to the value of $10 million at a fixed interest rate of 10% per annum for a period of one year.Assume the borrower only uses 50% of the provided funds over the course of the year.If the bank charges a back-end fee of 0.5%, what is the additional revenue the bank would generate?
A)None, unless the loan is prepaid early.
B)$2500
C)$25 000
D)$5000

Question

Quizplus · Accepted Answer

The bank's revenue from the loan interest is $1 million (10% of $10 million), but since the borrower only uses 50% of the funds, the interest revenue will also be halved to $500,000. The back-end fee is calculated as a percentage of the unused funds, which is 50% of $10 million or $5 million. Therefore, the back-end fee revenue will be 0.5% of $5 million or $25,000. The loan being prepaid early is not relevant to the calculation of the back-end fee revenue.

Assume a Bank Makes a Loan Commitment to the Value