Question

) At a meeting with a financial advisor, the use of bonds was strongly recommended over bank loans as a source of debt finance for a project. What may explain the financial advisor’s position on the source of debt?

Answer 1

Use of Bond over bank loans can be helpful for companies. Bonds are generally a type of debt instrument which are issued by the company and subscribed by the public and they will be paying rate of interest which are to be paid by the company in Return and they will be redeemed at the maturity.

Company will be having flexibility on issuance of the bonds because they will be tradable in nature and they will be issued in trenches by the company and they can even be having a callable feature which will mean that the company can protect itself from the market rate of interest by calling the bonds when it will be thinking appropriate and preventing itself from paying a higher rate of return.

Issuance of bonds will be giving the company's higher degree of freedom to operate as they deem fit because it's free from restriction that are often attached to the loan by the bank so lenders and creditors are often requiring the corporates to agree to a variety of limitation such as not issuing more debt or not to make corporate acquisition until their loans are paid entirely but Bond subscribers will not be having any conditions like this and they are much flexible than the bank loans.

Another important factor is the rate of interest which is to be paid on the the bond is often lesser than the rate of interest which will be paid to the bank loan.

When we will consider the repayment of both the debt capital, then Bond will be required to be repaired at the time of the maturity while bank loan will be having repayment of both the principal and interest during repayment period at regular intervals.

So, these are the benefits that are associated with bonds that will induce a financial advisor to advise the use of Bond against use of bank loans.