Firms Are Often Known to Pay Commitment Fees to Banks

question 76

Essay

Firms are often known to pay commitment fees to banks for the privilege of receiving a line of credit. Does it make sense for a firm to pay for something that, at least at the present time, it does not know whether it will use?

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Definitions:

Mental Accounting

The process by which individuals categorize and evaluate economic outcomes by organizing them into specific accounts in their minds.

Framing Bias

A cognitive bias where people decide on options based on whether the choices are presented with positive or negative connotations.

Positively Correlated

A relationship between two variables where they move in the same direction, meaning as one variable increases, the other does as well.

Trading Activity

The volume or quantity of buying and selling transactions in a financial market over a specific period.