Asked by Katelyn Goodridge on Apr 29, 2024
Verified
Which of the following is true of commitment fees?
A) Commitment fees are in the neighborhood of one quarter of 1% per year.
B) Commitment fees are approximately three-fourth of 1% per year.
C) Commitment fees are usually half of the risk-free rate.
D) Commitment fees are in the neighborhood of the risk-free rate.
Commitment Fees
Fees charged by lenders to a borrower for an unused or untapped credit line, ensuring the lender retains availability of the funds.
Risk-Free Rate
The theoretical rate of return of an investment with zero risk, often represented by government bonds.
- Understand the purposes and costs associated with holding cash in a firm.
Verified Answer
MW
Matayiah WhiteApr 30, 2024
Final Answer :
A
Explanation :
Commitment fees are generally in the range of one quarter of 1% per year. This fee is charged by lenders to keep a line of credit or loan available to the borrower, even if the borrower doesn't draw down on it. The fee compensates the lender for tying up capital that could be deployed elsewhere.
Learning Objectives
- Understand the purposes and costs associated with holding cash in a firm.