Bank A offers the following terms for a $10 million loan

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

a Which terms are better if the firm intends to borrow the $10 million for the entire year?
b If the firm plans to use the funds for only three months, which terms are better?

TUTORIAL PREVIEW

a. Cost of Bank A's loan:        

       Interest payment: (.08) x ($10,000,000) = $800,000

       Fee: none if the loan is outstanding for the entire year

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