Inland Oil arranged a $10,000,000 revolving credit agreement with a group of sma
ID: 2349218 • Letter: I
Question
Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks. The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment. On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually borrowed on an annual, simple interest basis. The prime rate was at 9 percent for the year. If Inland borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar cost of the loan agreement for one year?Explanation / Answer
GIven this To find the interest rate on borrowed funds = 0.09 + 0.015 = 10.5% = 0.105 The Cost of unused portion: $4,000,000 * 0.005 = $ 20,000 Cost of used portion: $6,000,000 * 0.105 = 630,000 Hence, Total cost of loan agreement $650,000