QUESTION 7 A company receives a 5-year $100 million loan commitment from Wells Fargo at a fixed rate of 4.5%. The up-front commitment fee is 40 basis points and the unused portion of the loan is charged 15 basis points. The bank borrows a total of $45 million at the beginning of the year and none thereafter. The following is true, except: The interest paid on the drawdown amount for the full year is $2,025,000. The interest rate paid on the drawdown amount for the full year is 4.90% The fee for the loan commitment for the full year is $400,000. The fee for the unused portion of the loan commitment for the full year is $82,500 QUESTION 8 A bank agrees to buy three-month forward €500,000 at $1.14/€ from its client and simultaneously sells three-month €500,000 at $1.16/€ to offset the position. Three months later the Euro appreciates to $1.15/€ and the client declares bankruptcy. The following is true, except At the end of three months, the bank will incur a loss of $5,000 compared to the expected gain. At the end of the three month, the bank will incur a gain of $5,000 compared to the expected gain. The current transaction requires the bank In three months to purchase €500,000 in exchange for $570,000. The current transaction requires the bank In three months to sell €500,000 in exchange for $580,000.

Answered: QUESTION 7 A company receives a 5-year $100 million loan commitment from Wells Fargo at a fixed rate of 4.5%. The up-front commitment fee is 40 basis…

Essentials Of Investments

11th Edition

ISBN: 9781260013924

Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher: Mcgraw-hill Education,

See similar textbooks

Concept explainers

Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are…

Question

QUESTION 7

A company receives a 5-year $100 million loan commitment from Wells Fargo at a fixed rate of 4.5%. The up-front commitment fee is 40 basis points and the unused portion of the loan is charged 15 basis points. The bank borrows a total of $45 million at the beginning of the year and none thereafter. The following is true, except:

		The interest paid on the drawdown amount for the full year is $2,025,000.
		The interest rate paid on the drawdown amount for the full year is 4.90%
		The fee for the loan commitment for the full year is $400,000.
		The fee for the unused portion of the loan commitment for the full year is $82,500

QUESTION 8

A bank agrees to buy three-month forward €500,000 at $1.14/€ from its client and simultaneously sells three-month €500,000 at $1.16/€ to offset the position. Three months later the Euro appreciates to $1.15/€ and the client declares bankruptcy. The following is true, except

		At the end of three months, the bank will incur a loss of $5,000 compared to the expected gain.
		At the end of the three month, the bank will incur a gain of $5,000 compared to the expected gain.
		The current transaction requires the bank In three months to purchase €500,000 in exchange for $570,000.
		The current transaction requires the bank In three months to sell €500,000 in exchange for $580,000.

Expert Solution

Step 1

A loan commitment is a promise made by a corporate or other finance institutions to lend a specific amount of money to a company or individual. A loan commitment is helpful for individuals wanting to purchase a home or for businesses preparing to make a significant purchase.

The parties to a forward are committed to purchase or sell the underlying product at expiration.

Related questions

Concept explainers

QUESTION 7

QUESTION 8