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:

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