The fee for issuing the SBLC is $10,000 The net savings to the issuer is $1,250 The amount received by the issuer for the commercial paper without an SBLC is $9,945,625. The difference in the amount received by the issuer with and without the SBLC is $1,875.
QUESTION 5
-
A company can issue a 45-day $10 million commercial paper at a rate of 4.50%. It can reduce the rate to 4.35% if it is backed by a standby letter of credit (SBLC). A bank is willing to issue the SBLC for a fee of 10 basis points. The following is true:
The fee for issuing the SBLC is $10,000
The net savings to the issuer is $1,250
The amount received by the issuer for the commercial paper without an SBLC is $9,945,625.
The difference in the amount received by the issuer with and without the SBLC is $1,875.
QUESTION 6
-
The following is true about loan commitments, except
Banks issuing fixed-rate loans face interest rate risk
Borrowers are likely to drawdown on their loan commitment when adverse events affect their credit rating
Borrowers issuing floating rate loans are not subject to credit risk
Borrowers pay more for loans taken under loan commitments than traditional loans
-
First, let us understand the commercial paper
A commercial paper is otherwise an unsecured instrument. Interest is deducted from the face value at the time of issuance.
And next, we know the brief info of SBLC is
A standby letter of credit will act as a security and hence interest rate will be lower. However, there is a charge for the issuance of SBLC. Several statements have been made related to this transaction. Correct statements need to be identified.
given data as per the question
Face value of the commercial paper, FV = 10 million = 10,000,000
SBLC charges as % of face value, p = 10 bps = 0.1% (1 bps = 0.01%)
Interest rate without SBLC, i0 = 4.5%
The interest rate with SBLC, i1 = 4.35%
Days to maturity, n = 45
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
