Module 2 · Chapter 6

Interest, Fees and the Cost of Money

A loan costs interest on the money drawn and fees for everything else. This chapter shows how the floating rate is built and what late payment, early repayment and an unused promise cost.

≈ 12 min read 8-question test

In this chapter

  • How the interest rate is built and fixed for each period
  • What late payment, a failed benchmark and early repayment cost
  • Which fees the borrower pays, and what each one pays for

6.1The price of a loan in one paragraph

A borrower pays for a loan in two ways. It pays interest on the money it has drawn, and fees for everything else. The fees pay for the banks' promise to lend, for building the deal and for running it.

On the Sunrise loan the interest rate is EURIBOR, a published market rate, plus a fixed margin. EURIBOR repays the banks' own cost of raising the money, and the banks keep the margin.

Key point

EURIBOR passes on the banks' funding cost, and the margin is their reward. When bankers talk about pricing, they mean the margin and the fees. Nobody negotiates EURIBOR.

Also in this chapter

  1. How the rate is built: EURIBOR plus the margin
  2. The zero floor protects the margin
  3. Choosing the length of an interest period
  4. When a period ends and interest is paid
  5. One quarter's interest, worked through
  6. Late payment: default interest
  7. When the benchmark fails: market disruption
  8. Early repayment: break costs
  9. The fees and what each one pays for
  10. Your job

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