Abstract
The interdependence of loan cost and tangible bank activity is an aspect of the cost of bank debt that has not been treated in the literature. Understanding this interdependence is important for banks in pricing their services, especially as banks adopt more flexible pricing policies. This understanding is crucial for a firm in establishing the true cost of bank borrowing, in comparing bank borrowing with other sources of funds, and in evaluating the firm's banks. It is also important for understanding the firm-bank relationship in general and the cost of capital in particular.
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