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?