Find the annual financing cost of a 45 day revolving credit agreement with a 0.5% commitment fee. Assume you borrow $231,886m at 5.53%. You can borrow up to $500,000.
The answer is 6.1%
Working Notes
Annual Financing Cost = (interst cost +commitment fee) / usable funds * 365 / time period of aggrement
1. Borrowed Amount = $ 231886
Interest Rate = 5.53%
Interest Cost = Borrowed amount * Interest rate * time period of aggrement
= 231886 * 5.53 / 100 *45/365
= $1581
2. Commitment fee is calculated on the unused portion of the credit / borrowing limit.
Commitment fee = 0.5%
Borrowing Limit = $ 500000
Borrowed amount or used portion of borrowed limit (usable funds) = $ 231886
Unused portion = $ 500000 - $ 231886 = $ 268114
Commitment fee = unused portion * fee rate * time period of aggrement
= 268114 * 0.5/100 * 45/365
= $ 165
3. Annual Financing Cost = (interst cost +commitment fee) / usable funds * 365 / time period of aggrement
Annual Financing Cost = ($1581 + $165) / 231886 *365/45
= 1746 / 231886 *365/45
= .061 or 6.1%
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