Problem:
Bank A offers the following terms for a $10 million loan:
- interest rate: 8 percent for one year on funds borrowed
- fees: 0.5 percent of the unused balance for the unused term of the loan
Bank B offers the following terms for a $10 million loan:
- interest rate: 6.6 percent for one year on funds borrowed
- fees: 2 percent origination fee
Which terms are better if the firm intends to borrow the $10 million fr the entire year?
If the firm plans to use the funds for only three months, which terms are better?