# Question

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?

• 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?

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