Answer Happy

At close-2020 a Company established a $400 million Line of
Credit with a Bank. The agreed charges are:
One-month LIBOR + 2.5% for amounts Drawn
0.2% on the unused Line
LIBOR is set on the first of the month (or the first business
day). Costs are calculated and paid on a monthly basis.
Use the following table for 2021 to calculate monthly charges,
given the amounts drawn down or repaid (assume these occur at the
beginning of the respective months). Be mindful of the
day-counts!
LIBOR
Amount Drawn (+) or Repaid (−)
January
1%
+$200,000,000
February
1%
+$50,000,000
March
1.125
−$5,000,000
April
1.25%
+$20,000,000
May
1.25%
0
June

1.5%
+6,000,000
July
1/25%
−$25,000,000
August
1.5%
+$10,000.000
September
1.75%
−$50,000,000
October
2%
+$120,000.000
November
2%
0
December
2%
−$30,000,000
Suggestion: Create a third column where you fill in the
total loan outstanding. Create another column where you
calculate the interest paid on the amount in the preceding column
(add 2.5 to LIBOR and multiply correctly). Then add another
column for the amount of the undrawn line. Calculate the fees
on that and sum the charges for the month.
Extra Credit Question: How do you think you would
calculate the total return the bank earned for the year on its
lending to the Company (known as the “effective” interest
rate)?
Bonus Question: Assume the bank borrows the money it lends
to the Company, and it pays LIBOR. Assume bank regulations
require the bank to hold equity capital of 8% for company loans and
1% for undrawn credit lines. What is the ROE the bank earned
on this credit line agreement?