REH Company, a major real estate developer, has a $2 million revolving credit agreement with its bank. Its average borrowing under the agreement for the past year was $1.5 million. The bank charges a commitment fee of 0.5%. Because the average unused portion of the committed funds was $500,000 ($2 million $1.5 million), the commitment fee for the year was $2,500 (0.005 x $500,000). Of course, REH also had to pay interest on the actual $1.5 million borrowed under the agreement. Assuming that $160,000 interest was paid on the $1.5 million borrowed, the effective cost of the agreement was 10.83% [($160,000 + $2,500)/$1,500,000]. Although more expensive than a line of credit, a revolving credit agreement can be less risky from the borrower’s viewpoint, because the availability of funds is guaranteed.