A Corporation Is Planning to Issue $10 Million Worth of 180-Day

question 15

Multiple Choice

A corporation is planning to issue $10 million worth of 180-day commercial paper. In order to reduce the interest rates by 25 basis points (per year) , it plans to back this issue with a standby letter of credit or a loan commitment. The standby letter of credit is available for 20 basis points (per year) to be paid up-front. The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee.
-Which method is preferable, between the loan commitment and the standby letter of credit?

• A)The loan commitment is preferable because the savings are greater.
• B)The standby letter of credit is preferable because the savings are greater.
• C)The loan commitment is preferable it has a lower risk of default.
• D)The standby letter of credit is preferable because it has a lower risk of default.
• E)The loan commitment is preferable because the back-end fee is payable at the end of the year.

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Definitions:

Debt Amount

The total sum of money that is owed by an individual, company, or other entity.

Federal Exemptions

Provisions within federal law that allow individuals or entities to be excluded from certain rules, obligations, or liabilities.

State Law

The body of law enacted by each state in the United States, governing within its own territory outside of federal regulations.

Bankrupt Party

A term referring to an individual or entity that has been legally declared unable to pay their debts.