A Corporation Is Planning to Issue $10 Million Worth of 180-Day

Multiple Choice

A corporation is planning to issue $10 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 $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee.
-What are the savings to the corporation if it obtains a standby letter of credit to back its $10 million issue of commercial paper?

A) $1,250.
B) $2,500.
C) $3,750.
D) $5,000.
E) $6,250.