Revolver All-In Cost Calculation
5 minutes
5 Questions
In CTP's Capital Structure and Long-Term Capital area, a revolving credit facility (revolver) is a committed bank line that a firm may draw, repay, and redraw up to a stated limit. Because pricing has several components, treasurers compute an all-in cost to compare it fairly with other financing sources. Key cost components: 1. Interest on drawn amounts: a floating base rate (SOFR or prime) plus a credit spread, often tied to a leverage or ratings grid. 2. Commitment (unused) fee: a percentage charged on the undrawn portion for keeping funds available. 3. Upfront/arrangement fee: a one-time fee paid at closing, amortized over the facility's life. 4. Other fees: agent, administrative, or legal fees, and sometimes compensating balance requirements, which raise the effective rate. Basic formula: All-in cost (%) = (Interest on drawn balance + Commitment fee on unused balance + Amortized upfront and other fees) / Average drawn amount. Example: A $10 million revolver, average draw $4 million, SOFR 5.0% plus 1.5% spread (6.5%), 0.30% commitment fee on $6 million unused, and a $50,000 upfront fee amortized over a 5-year term ($10,000 per year). - Interest: $4,000,000 × 6.5% = $260,000 - Commitment fee: $6,000,000 × 0.30% = $18,000 - Amortized upfront fee: $10,000 - Total annual cost: $288,000 - All-in cost: $288,000 / $4,000,000 = 7.2% Note the all-in cost (7.2%) exceeds the nominal rate (6.5%) because fees are spread over the drawn amount. If a compensating balance is required, divide by funds actually usable to get a higher effective cost. Lower utilization pushes the all-in rate higher, since fixed fees are absorbed by fewer borrowed dollars. Why it matters: treasurers use the all-in cost to decide optimal utilization, negotiate fee structures, compare revolvers against commercial paper or term debt, and assess the true cost of liquidity backup. CTP exam questions frequently test the ability to incorporate commitment fees and upfront fees into an effective annual rate.
Revolver All-In Cost Calculation: A Complete CTP Study Guide
Why This Topic Matters
Revolving credit facilities (revolvers) are the workhorse of short-term and intermediate corporate financing. Treasury professionals use them to cover seasonal working capital swings, bridge timing gaps, and serve as liquidity backstops for commercial paper programs. Because banks price revolvers with several separate charges, the stated interest rate almost never equals what the borrower actually pays. The CTP exam tests whether you can translate the headline rate plus all the fees into a single all-in (effective) annual cost, which is the number a treasurer uses to compare a revolver against commercial paper, a term loan, factoring, or simply holding more cash. This concept sits inside the Capital Structure and Long-Term Capital domain and is a classic calculation question, so mastering it is a reliable way to pick up points.
What a Revolver Is
A revolving credit facility is a committed line of credit under which a borrower may draw, repay, and re-borrow up to a stated maximum (the commitment) over the life of the agreement, typically one to five years. The bank earns money in several ways:
1. Interest on drawn balances, usually a floating base rate (SOFR, prime, or a bank base rate) plus a credit spread (margin) tied to the borrower's credit quality or leverage grid.
2. Commitment fee, charged on the unused (undrawn) portion of the commitment to compensate the bank for setting aside capital.
3. Facility fee, charged on the entire commitment whether drawn or not (common in investment-grade deals, often used instead of a commitment fee).
4. Upfront, arrangement, or origination fee, a one-time charge paid at closing, usually expressed as a percentage of the total commitment.
5. Agency or administrative fees, flat annual dollar amounts, especially in syndicated facilities.
6. Compensating balance requirements, which force the borrower to keep a percentage of the line or of the borrowed amount on deposit, effectively reducing usable funds.
The Core Formula
All-In Annual Cost (%) = Total Annual Cost of the Facility divided by Average Amount Actually Borrowed (or usable funds), expressed as a percentage.
Where Total Annual Cost = Interest Expense + Commitment Fee (on unused portion) + Facility Fee (on total commitment) + Annualized Upfront Fee + Other Annual Fees.
And Usable Funds = Average Borrowed Amount minus any Compensating Balance that must be held (if the balance is required on top of what the company would otherwise keep).
Key idea: fees are spread over the borrowed dollars, not the committed dollars, because the borrowed dollars are the only ones you actually get to use. The lower your usage, the more the fixed fees inflate the effective rate.
Step-by-Step Method
Step 1: Identify the total commitment (the line size).
Step 2: Identify the average drawn (borrowed) balance for the year.
Step 3: Compute the unused portion = Commitment minus Average Drawn.
Step 4: Compute interest = Average Drawn times All-in Interest Rate (base rate + spread).
Step 5: Compute commitment fee = Unused Portion times Commitment Fee Rate.
Step 6: Compute facility fee (if any) = Total Commitment times Facility Fee Rate.
Step 7: Annualize the upfront fee = Upfront Fee divided by number of years in the facility (or treat as a full-year cost if the question says it is paid annually or the facility is one year).
Step 8: Add any flat agency fees.
Step 9: Sum all costs for Total Annual Cost.
Step 10: Determine usable funds = Average Drawn minus incremental Compensating Balance (if applicable).
Step 11: Divide Total Annual Cost by Usable Funds and convert to a percentage.
Step 12: If the borrowing period is less than one year, annualize using 365 (or 360 if specified) divided by days outstanding.
Worked Example 1: Basic All-In Cost
A company has a $20 million one-year revolver. It expects to borrow an average of $12 million during the year. Interest is SOFR (4.50%) plus 1.50%, so 6.00%. The commitment fee is 0.375% on the unused portion, and there is a 0.25% upfront fee on the total commitment.
Interest = $12,000,000 x 6.00% = $720,000
Unused portion = $20,000,000 - $12,000,000 = $8,000,000
Commitment fee = $8,000,000 x 0.375% = $30,000
Upfront fee = $20,000,000 x 0.25% = $50,000
Total annual cost = $720,000 + $30,000 + $50,000 = $800,000
All-in cost = $800,000 / $12,000,000 = 6.67%
Notice the all-in cost is 67 basis points above the stated 6.00% rate. That difference is what the exam is testing.
Worked Example 2: Multi-Year Facility with Facility Fee
A $50 million three-year revolver carries a 0.20% facility fee on the whole line, a 1.00% upfront fee, and interest of 7.00% on drawn amounts. Average usage is $30 million.
Interest = $30,000,000 x 7.00% = $2,100,000
Facility fee = $50,000,000 x 0.20% = $100,000
Annualized upfront fee = ($50,000,000 x 1.00%) / 3 = $166,667
Total annual cost = $2,366,667
All-in cost = $2,366,667 / $30,000,000 = 7.89%
Because a facility fee applies to the whole commitment, there is no separate unused-portion calculation unless the question also lists a commitment fee.
Worked Example 3: Compensating Balance
A company borrows $5 million at 8.00% under a $10 million line with a 0.50% commitment fee on the unused portion. The bank requires a 10% compensating balance on the borrowed amount, which the company would not otherwise hold.
Interest = $5,000,000 x 8.00% = $400,000
Commitment fee = $5,000,000 x 0.50% = $25,000
Total cost = $425,000
Compensating balance = $5,000,000 x 10% = $500,000
Usable funds = $5,000,000 - $500,000 = $4,500,000
All-in cost = $425,000 / $4,500,000 = 9.44%
If the question says the company already keeps balances that satisfy the requirement, do not reduce usable funds. If the compensating balance earns interest credits, subtract those credits from the total cost.
Worked Example 4: Partial-Year Annualization
A firm draws $2 million for 90 days at 6.00% and pays a $5,000 commitment fee for the period. Interest = $2,000,000 x 6.00% x 90/365 = $29,589. Total cost = $34,589. Period cost = $34,589 / $2,000,000 = 1.73%. Annualized = 1.73% x 365/90 = 7.01%. Watch whether the question specifies a 360-day or 365-day year.
Interpreting the Result
The all-in cost is compared against alternatives such as commercial paper (which has its own all-in cost including dealer fees, backup line fees, and rating agency fees), asset-based lending, or a term loan. A low utilization rate pushes the all-in cost up sharply, which is why companies sometimes right-size an oversized revolver. Conversely, a revolver that is heavily used behaves more like a term loan and its all-in cost converges toward the stated interest rate plus a small fee premium.
Common Pitfalls
1. Dividing by the total commitment instead of the amount borrowed. The denominator is the borrowed (usable) amount.
2. Applying the commitment fee to the drawn balance. It applies to the unused balance only.
3. Confusing a facility fee (whole line) with a commitment fee (unused portion).
4. Forgetting to annualize a multi-year upfront fee, or forgetting to annualize a partial-year borrowing.
5. Ignoring compensating balances or double-counting them when the company already holds the required cash.
6. Failing to add the spread to the base rate before computing interest.
7. Treating one-time fees as recurring every year without reading the facility term.
Exam Tips: Answering Questions on Revolver All-In Cost Calculation
1. Draw a three-line layout: Commitment, Drawn, Unused. Fill in the dollar amounts first, then attach the correct rate to each line. This prevents mixing up which fee hits which balance.
2. Read the fee definitions carefully. The words unused, undrawn, or available signal a commitment fee on the gap; the words total, entire, or whole commitment signal a facility fee.
3. Build the interest rate before you multiply. If the question gives SOFR 4.25% plus 175 basis points, write 6.00% down first. Basis points conversions (175 bps = 1.75%) are a frequent trap.
4. Annualize everything to a single year before dividing. Divide multi-year upfront fees by the number of years; scale partial-year costs up by 365 over days.
5. Use the borrowed amount as the denominator, reduced by any incremental compensating balance. Never use the full commitment unless the facility is fully drawn.
6. Sanity check your answer. The all-in cost must be higher than the stated interest rate whenever fees exist. If your result is below the stated rate, you have made an error. The gap should be wider when usage is low.
7. Eliminate distractor answers. Exam choices often include the stated rate alone, the rate using the commitment as the denominator, and the rate with the commitment fee applied to the drawn balance. Recognizing these wrong paths helps you confirm the right one.
8. Carry decimals. Keep at least four decimal places in intermediate steps; round only at the end to match the answer choices (usually to two decimals).
9. Watch for interest earned on compensating balances or fee waivers, which reduce total cost, and for agency fees stated in dollars, which must be added to total cost directly.
10. Manage your time. These problems typically take two to three minutes. Write the formula, plug in, compute, verify the direction of the answer, and move on.
Quick Reference
All-In Cost = [Interest on Drawn + Commitment Fee on Unused + Facility Fee on Total + (Upfront Fee / Years) + Other Fees] / (Average Drawn - Incremental Compensating Balance)
Memorize this structure, practice with the four example patterns above, and you will be well prepared for any revolver all-in cost question on the CTP exam.
Revolving credit facilities (revolvers) are the workhorse of short-term and intermediate corporate financing. Treasury professionals use them to cover seasonal working capital swings, bridge timing gaps, and serve as liquidity backstops for commercial paper programs. Because banks price revolvers with several separate charges, the stated interest rate almost never equals what the borrower actually pays. The CTP exam tests whether you can translate the headline rate plus all the fees into a single all-in (effective) annual cost, which is the number a treasurer uses to compare a revolver against commercial paper, a term loan, factoring, or simply holding more cash. This concept sits inside the Capital Structure and Long-Term Capital domain and is a classic calculation question, so mastering it is a reliable way to pick up points.
What a Revolver Is
A revolving credit facility is a committed line of credit under which a borrower may draw, repay, and re-borrow up to a stated maximum (the commitment) over the life of the agreement, typically one to five years. The bank earns money in several ways:
1. Interest on drawn balances, usually a floating base rate (SOFR, prime, or a bank base rate) plus a credit spread (margin) tied to the borrower's credit quality or leverage grid.
2. Commitment fee, charged on the unused (undrawn) portion of the commitment to compensate the bank for setting aside capital.
3. Facility fee, charged on the entire commitment whether drawn or not (common in investment-grade deals, often used instead of a commitment fee).
4. Upfront, arrangement, or origination fee, a one-time charge paid at closing, usually expressed as a percentage of the total commitment.
5. Agency or administrative fees, flat annual dollar amounts, especially in syndicated facilities.
6. Compensating balance requirements, which force the borrower to keep a percentage of the line or of the borrowed amount on deposit, effectively reducing usable funds.
The Core Formula
All-In Annual Cost (%) = Total Annual Cost of the Facility divided by Average Amount Actually Borrowed (or usable funds), expressed as a percentage.
Where Total Annual Cost = Interest Expense + Commitment Fee (on unused portion) + Facility Fee (on total commitment) + Annualized Upfront Fee + Other Annual Fees.
And Usable Funds = Average Borrowed Amount minus any Compensating Balance that must be held (if the balance is required on top of what the company would otherwise keep).
Key idea: fees are spread over the borrowed dollars, not the committed dollars, because the borrowed dollars are the only ones you actually get to use. The lower your usage, the more the fixed fees inflate the effective rate.
Step-by-Step Method
Step 1: Identify the total commitment (the line size).
Step 2: Identify the average drawn (borrowed) balance for the year.
Step 3: Compute the unused portion = Commitment minus Average Drawn.
Step 4: Compute interest = Average Drawn times All-in Interest Rate (base rate + spread).
Step 5: Compute commitment fee = Unused Portion times Commitment Fee Rate.
Step 6: Compute facility fee (if any) = Total Commitment times Facility Fee Rate.
Step 7: Annualize the upfront fee = Upfront Fee divided by number of years in the facility (or treat as a full-year cost if the question says it is paid annually or the facility is one year).
Step 8: Add any flat agency fees.
Step 9: Sum all costs for Total Annual Cost.
Step 10: Determine usable funds = Average Drawn minus incremental Compensating Balance (if applicable).
Step 11: Divide Total Annual Cost by Usable Funds and convert to a percentage.
Step 12: If the borrowing period is less than one year, annualize using 365 (or 360 if specified) divided by days outstanding.
Worked Example 1: Basic All-In Cost
A company has a $20 million one-year revolver. It expects to borrow an average of $12 million during the year. Interest is SOFR (4.50%) plus 1.50%, so 6.00%. The commitment fee is 0.375% on the unused portion, and there is a 0.25% upfront fee on the total commitment.
Interest = $12,000,000 x 6.00% = $720,000
Unused portion = $20,000,000 - $12,000,000 = $8,000,000
Commitment fee = $8,000,000 x 0.375% = $30,000
Upfront fee = $20,000,000 x 0.25% = $50,000
Total annual cost = $720,000 + $30,000 + $50,000 = $800,000
All-in cost = $800,000 / $12,000,000 = 6.67%
Notice the all-in cost is 67 basis points above the stated 6.00% rate. That difference is what the exam is testing.
Worked Example 2: Multi-Year Facility with Facility Fee
A $50 million three-year revolver carries a 0.20% facility fee on the whole line, a 1.00% upfront fee, and interest of 7.00% on drawn amounts. Average usage is $30 million.
Interest = $30,000,000 x 7.00% = $2,100,000
Facility fee = $50,000,000 x 0.20% = $100,000
Annualized upfront fee = ($50,000,000 x 1.00%) / 3 = $166,667
Total annual cost = $2,366,667
All-in cost = $2,366,667 / $30,000,000 = 7.89%
Because a facility fee applies to the whole commitment, there is no separate unused-portion calculation unless the question also lists a commitment fee.
Worked Example 3: Compensating Balance
A company borrows $5 million at 8.00% under a $10 million line with a 0.50% commitment fee on the unused portion. The bank requires a 10% compensating balance on the borrowed amount, which the company would not otherwise hold.
Interest = $5,000,000 x 8.00% = $400,000
Commitment fee = $5,000,000 x 0.50% = $25,000
Total cost = $425,000
Compensating balance = $5,000,000 x 10% = $500,000
Usable funds = $5,000,000 - $500,000 = $4,500,000
All-in cost = $425,000 / $4,500,000 = 9.44%
If the question says the company already keeps balances that satisfy the requirement, do not reduce usable funds. If the compensating balance earns interest credits, subtract those credits from the total cost.
Worked Example 4: Partial-Year Annualization
A firm draws $2 million for 90 days at 6.00% and pays a $5,000 commitment fee for the period. Interest = $2,000,000 x 6.00% x 90/365 = $29,589. Total cost = $34,589. Period cost = $34,589 / $2,000,000 = 1.73%. Annualized = 1.73% x 365/90 = 7.01%. Watch whether the question specifies a 360-day or 365-day year.
Interpreting the Result
The all-in cost is compared against alternatives such as commercial paper (which has its own all-in cost including dealer fees, backup line fees, and rating agency fees), asset-based lending, or a term loan. A low utilization rate pushes the all-in cost up sharply, which is why companies sometimes right-size an oversized revolver. Conversely, a revolver that is heavily used behaves more like a term loan and its all-in cost converges toward the stated interest rate plus a small fee premium.
Common Pitfalls
1. Dividing by the total commitment instead of the amount borrowed. The denominator is the borrowed (usable) amount.
2. Applying the commitment fee to the drawn balance. It applies to the unused balance only.
3. Confusing a facility fee (whole line) with a commitment fee (unused portion).
4. Forgetting to annualize a multi-year upfront fee, or forgetting to annualize a partial-year borrowing.
5. Ignoring compensating balances or double-counting them when the company already holds the required cash.
6. Failing to add the spread to the base rate before computing interest.
7. Treating one-time fees as recurring every year without reading the facility term.
Exam Tips: Answering Questions on Revolver All-In Cost Calculation
1. Draw a three-line layout: Commitment, Drawn, Unused. Fill in the dollar amounts first, then attach the correct rate to each line. This prevents mixing up which fee hits which balance.
2. Read the fee definitions carefully. The words unused, undrawn, or available signal a commitment fee on the gap; the words total, entire, or whole commitment signal a facility fee.
3. Build the interest rate before you multiply. If the question gives SOFR 4.25% plus 175 basis points, write 6.00% down first. Basis points conversions (175 bps = 1.75%) are a frequent trap.
4. Annualize everything to a single year before dividing. Divide multi-year upfront fees by the number of years; scale partial-year costs up by 365 over days.
5. Use the borrowed amount as the denominator, reduced by any incremental compensating balance. Never use the full commitment unless the facility is fully drawn.
6. Sanity check your answer. The all-in cost must be higher than the stated interest rate whenever fees exist. If your result is below the stated rate, you have made an error. The gap should be wider when usage is low.
7. Eliminate distractor answers. Exam choices often include the stated rate alone, the rate using the commitment as the denominator, and the rate with the commitment fee applied to the drawn balance. Recognizing these wrong paths helps you confirm the right one.
8. Carry decimals. Keep at least four decimal places in intermediate steps; round only at the end to match the answer choices (usually to two decimals).
9. Watch for interest earned on compensating balances or fee waivers, which reduce total cost, and for agency fees stated in dollars, which must be added to total cost directly.
10. Manage your time. These problems typically take two to three minutes. Write the formula, plug in, compute, verify the direction of the answer, and move on.
Quick Reference
All-In Cost = [Interest on Drawn + Commitment Fee on Unused + Facility Fee on Total + (Upfront Fee / Years) + Other Fees] / (Average Drawn - Incremental Compensating Balance)
Memorize this structure, practice with the four example patterns above, and you will be well prepared for any revolver all-in cost question on the CTP exam.
Test mode:
CTP - Revolver All-In Cost Calculation Example Questions
Test your knowledge of Revolver All-In Cost Calculation
Question 1
Why does the effective all-in borrowing cost of a revolving credit facility rise as the average amount drawn under the facility decreases?
Question 2
A company has a one-year, $50 million revolving credit facility. Over the year it borrowed an average of $20 million at an all-in drawn rate of 6.00% (SOFR plus spread). The bank charges a 0.30% commitment fee on the average unused balance and charged an upfront fee of 0.50% on the total commitment at closing. The treasury analyst treats all fees as costs for the year and expresses the cost as a simple annual rate on average funds borrowed, rounded to two decimal places. What is the facility's effective all-in borrowing cost?
Question 3
When computing a revolving credit facility's all-in borrowing cost, the commitment fee is normally assessed on which amount?
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