COMMITMENT FEE

A fee paid to a commercial bank in return for its legal commitment to lend funds that have not yet been advanced. Often used in risk arbitrage. Payment to institutional investors in the U.K. (pension funds and life insurance companies) by the lead underwriter of a takeover that takes place when the underwriter provides the target company's shareholders with a cash alternative for a target company's shares in exchange for the bidding companies' shares. The payment is typically 0.5% for the first 30 days, 1.25% for each week thereafter and a final 0.75% acceptance payment when the takeover is completed.