bank A offers the folowing terms for a $10 million loan; -interest rate 8 percen

Question

bank A offers the folowing 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: 0.5 percent origination fee

which terms are better if the firm intends to borrow the $10 million for the entire year?

if the firm plans to use the funds for only three months, which terms are better, why?

Explanation / Answer

Bank B is better , as in Bank B the costs would be 7.1% as compared to 8% costs of Bank A Bank A is better as it would cost only 2.5% with BANK A and 7.1% with Bank B.

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