1. Which of the following correctly states relativeness of the Libor/Prime Spreads and Base Rates?

a) Libor Spread is usually lower than Prime Spread and Libor Base Rate is lower than Prime Base Rate
b) Libor Spread is usually higher than Prime Spread and Libor Base Rate is lower than Prime Base Rate
c) Libor Spread is usually higher than Prime Spread and Libor Base Rate is higher than Prime Base Rate
d) Libor Spread is usually lower than Prime Spread and Libor Base Rate is higher than Prime Base Rate

Answer (Highlight area below to see answer)

b) Libor Spread is usually higher than Prime Spread and Libor Base Rate is lower than Prime Base Rate

The Libor Spread is usually a point higher than the Prime Spread - i.e. if Libor is 3%, Prime will probably be 2%. That is the most usual scenario - however, there have been a few instances when the Libor and Prime have been the same. Prime Base Rate is currently 7.5% while Libor 3 month is currently 4.25125% (4/27/01). Libor changes daily and is based on a time period of 1, 2, 3, 6, 9 or 12 month Libor rate sets.

2. Prime is not a true "contract" but has specific payment dates set within a Credit Agreement. What is the usual time period for a Prime payment?

a) Semiannually
b) Monthly
c) Quarterly
d) Yearly

Answer (Highlight area below to see answer)

c) Quarterly

The answer is that the majority of the bank deals will specifiy quarterly payment dates in the Credit Agreement. The most used is fiscal quarters, however there are a fair number that use different dates like the 3/15, 6/15, 9/15 and 12/15. There are also a handful of Issuers who pay Prime Interest monthly - they usually set monthly payment dates - i.e. first of the month, on the 10th of each month, etc.

3. A Letter of Credit Fee is most often equal to which of the following?

a) Libor Spread
b) Prime Spread
c) Unfunded Fee
d) Fixed Coupon

Answer (Highlight area below to see answer)

a) Libor Spread

Most Credit Agreements list the Letter of Credit (LOC) fee equal to the Libor Spread. Often when the Libor and Prime Spreads change, so does the LOC Fee. There are a few banks who use multiple LOC's - for example, Chase Manhattan will sometimes have Standby Letter of Credit and Trade Letter of Credit Fees, both accruing different fees. The Letter of Credit is an unfunded amount, but earns a higher fee than the unfunded.