Question

In: Finance

Which of the following is NOT a difference between bank loans and corporate bonds.    Bank...

Which of the following is NOT a difference between bank loans and corporate bonds.

  

Bank loans typically have more covenants than corporate bonds.

Bank loans typically have a longer maturity than corporate bonds.

Bank loans typically carry a floating interest rate, while corporate bonds carry a fixed rate of interest.

Bank loans can be prepaid while corporate bonds cannot unless they have a callability provision.

Solutions

Expert Solution

Which of the following is NOT a difference between bank loans and corporate bonds.

Bank loans typically have more covenants than corporate bonds: As per the Sanction Letter of the Banks, they prefer to keep more financial and non-financial covenants for issuing a Loan.

Bank loans typically have a longer maturity than corporate bonds. No. The Bank Loans has shorter maturity periods as compared to Corporate Bonds; Bonds generally scale longer terms like 7 years, 10 years etc with a periodic buyback option. Howrever, Banks typically have long term debt ranging from more than 1 year to 3 years/ 5 years or so, subject to Prepayments in middle.

Bank loans typically carry a floating interest rate, while corporate bonds carry a fixed rate of interest. Bank Loans interest generally are tagged with the basis points on LIBOR or EURIBOR or other index, however, Corporate Bonds in general are Fixed in nature.

Bank loans can be prepaid while corporate bonds cannot unless they have a callability provision. Bank loans can be prepaid normally depending on the agreed prepaid pattern or with some prepayment penalty; However, unless callability / Buyback provision is there, the bonds cannot be prepaid.

Answer: Bank loans typically have a longer maturity than corporate bonds. This is NOT a difference between Bank Loans and Corporate Bonds.


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