Question

how is bond financing advantageous to standard bank loans?

Answer 1

Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer. Both bonds and bank loans are debt instruments that allow corporations to borrow money.

Advantages of Bonds

- A borrower can usually get better terms by issuing bonds than from a bank loan. The interest rate and other terms of bank loans are set by the bank whereas when a company issues a bond, it sets the interest rate and other terms, albeit based on the current market conditions, otherwise investors won’t be interested.

- Most bank loans come with multiple conditions, or covenants, that the borrower must follow for the life of the loan.if a bank finds a borrower in violation of a loan covenant, it has the demand its immediate repayment. No such restrictions exist for bonds. once a bond is sold to investors, the issuer’s only obligation is to pay the interest and return the principal at maturity.

- in case of Bonds, Investors can choose the maturities, annual yield and amount of risk they are willing to take. In addition, there are multiple bond funds that invest in different types of bonds. The only way investors can invest in bank loans is through a bank loan fund.

- Interest rates on government bonds are usually lower.

- Bonds tend to be only repaid in full at the end of the period – e.g. 10 or 20 years. Banks may expect repayment of both interest and principal during the repayment period.