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The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees
Author(s) -
BERG TOBIAS,
SAUNDERS ANTHONY,
STEFFEN SASCHA
Publication year - 2016
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12281
Subject(s) - loan , drawdown (hydrology) , business , term loan , call option , actuarial science , finance , economics , monetary economics , participation loan , non performing loan , geotechnical engineering , aquifer , groundwater , engineering
More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lines and the cancellation option in term loans, and (2) fees are used to screen borrowers based on the likelihood of exercising these options. We also propose a new total‐cost‐of‐borrowing measure that includes various fees charged by lenders.