The Cost of Capital: Loan Fee Income for a Financial Institution
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Question: An FI makes a loan commitment of $2,500,000 with an up-front fee of 50 basis points and a back-end fee of 25 basis points on the unused portion of the loan. The takedown on the loan is 50%.
What are the total fees earned by the FI at the end of the year, that is, in future value terms? Assume the cost of capital for the FI is 6%
I don't understand how the cost of capital fits into this problem... is it relevant at all?
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Solution Preview
The cost of capital is important because we have to calculate the future value of fee and 6% is the rate to be used.
Take two scenarios;
(1) When 100% loan is taken, and
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Solution Summary
The solution calculates the total fees earned, but also explains how the cost of capital is important to the computations.
$2.49