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Calculate the savings to the corporation

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1. A U.S. corporation is planning to issue $20 million worth of 180-day commercial paper. In order to reduce the interest rates by 25 basis points (per year), it plans to back this issue with a standby letter of credit or a loan commitment. The standby letter of credit is available for 20 basis points (per year) to be paid up-front. The loan commitment for $20 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee.

(a) Calculate the savings to the corporation if it obtains a standby letter of credit to back its $20 million issue of commercial paper.

(b) Calculate the savings to the corporation if it obtains a loan commitment to back its $20 million issue of commercial paper.

(c) Explain with reasons which method is preferable, between the loan commitment and the standby letter of credit.

Reference no: EM132731526

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