Question

• A firm has the line of credit with an interest rate of 3% and a commitment fee of 0.25% based on the unused portion of the line.    The total funds available on the credit line equal $5,000,000.    The firm expects average daily borrowings of $3,500,000.

1. What’s the effective cost of this LOC?
2. If the bank asks for 10% compensating balance, what’s the effective cost of this LOC?

• A firm is looking to raise $5,000,000 from the commercial paper (CP) market.   It receives the following quotes:
  1. Maturity - 60-days
  2. Discount Rate - 0.50%
  3. Dealer Fee - 0.125%
  4. LOC Commitment Fee - 0.15%

What is the effective cost of issuing this CP?

Answer 1

a) The effective cost of LOC is tabulated as under:

Used Charge Unused Charge 10.27 297.951,08,750.00 Total Chg Annual 287.6715,00,000.00 35,00,000.00 2.18% Effective

b) If the bank asks for compensating balance, then the effective cost of LOC would be Rs 108,750 (the annual charge) divided by the net available draw, that is $4,500,000, that works out to 2.42%

c) The effective cost of the CP is as under:

Disc Chgs 25,000.00 Dealer Fees 6,250.00 7,500.00 LOC Fees Charges 38,750.00 Net Realisation 49,61,250.00 Eff Cost 4.69%

The charges are translated in to % by taking a base (net realisation) and then annualising as this is only issued for 60 days.