Casey’s One Stop has been approved for a $147,500 loan commitment from its local
ID: 2788076 • Letter: C
Question
Casey’s One Stop has been approved for a $147,500 loan commitment from its local bank. The bank has offered the following terms: term = one year, up-front fee = 50 basis points, back-end fee = 25 basis points, and rate on the loan = 7.25 percent. Casey’s expects to immediately take down $141,000 and no more during the year unless there is some unforeseen need. Calculate the total interest and fees Casey’s One Stop can expect to pay on this loan commitment. (Round your answer to 2 decimal places.) Total interest and fees $
Explanation / Answer
So we have to do 2 things here. One, is we have to calculate the interest payment that will be made by Casey's, while the other will be the Fees payable by Casey's.
To explain things better, the interest is paid on the money actually borrowed because obviously the Bank can't charge you interest for money that you don't owe the Bank yet!
However, let's say that the Bank approves a total withdrawable limit of X Dollars for you. The Bank will keep this fund in cash just for you. But you don't see the need to withdraw this fund throughout the year, maybe due to n number of reasons, but since the Bank was keeping these funds in cash for you, it would lose the interest income that it could've made on these funds, right? To remediate that, the bank will charge a fixed percentage fees on the total limit it has set for you. In this case these are a Front End Fees of 0.5% (or 50 basis points) and a Back-end Fees of 0.25% (25 basis points).
Front end fees is also called origination fees, which will be paid at the time the limit is assigned to you while the back-end fees will be paid at the end of the transaction.
The calculation for these fees & interest expense will be given as follows:
Interest = $141,000*7.25% = $10,222.50.
Front End Fees = $147,500*0.50% = $737.50.
Back End Fees = $147,500*0.25% = $368.75.
Hope that helped!
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