A firm has a committed line of credit with a maximum of $10 million and an interest rate of 8.5% (EAR) with a certain bank. The commitment fee is 0.5% (EAR). The firm borrows $2 million at the start of the year and then repays it at the end of the year. What is the total cost of the loan?
A) $520,000
B) $680,000
C) $210,000
D) $720,000

Question

Quizplus · Accepted Answer

C) Interest on borrowed funds = 0.085 × (2,000,000) = $170,000
Commitment fee paid on unused portion = 0.005 × (8,000,000) = $40,000
Total cost of loan = $210,000

A Firm Has a Committed Line of Credit with a Maximum