A Firm Has a Committed Line of Credit with a Maximum

question 84

Multiple Choice

A firm has a committed line of credit with a maximum of $2.5 million and an interest rate of 9% (EAR) with a certain bank. The commitment fee is 0.65% (EAR) . The firm borrows $2 million at the start of the year, and then repays it at the end of the year. What is the total cost of the loan?

• A) $180,000
• B) $183,250
• C) $193,000
• D) $212,500

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Definitions:

Equally Likely

A term used in probability to denote outcomes that have the same chance of occurring.

Continuous Probability Distributions

Mathematical functions that represent the probabilities of all possible continuous outcomes for a random variable.

Bernoulli Distribution

A probability distribution of a random variable that takes the value 1 with probability 'p' and the value 0 with probability '1-p'.

Pareto Distribution

A probability distribution used to describe phenomena in the natural and social sciences where a small proportion of occurrences leads to a large proportion of outcomes.