When companies need to borrow money, they can borrow from the bank or issue bonds. If the bank lends them money, the bank can then sell some of its exposure to the market to create bank loans. Bonds are also a form of debt – they are loans in which the investor acts as the bank. Investors lend the company money, which it promises to repay in full, with interest. But while bank loans and bonds can serve similar purposes, they have several differences.
HMW: There’s a couple of differences. Usually, the bank loans rank ahead of the bonds if something goes wrong. So what that means is, if the company goes bankrupt, then usually the bank loans get paid out before the bonds get paid out. So, the bonds usually are unsecured bonds, whereas the bank loans are often secured by the assets of the borrower. So that’s one difference. Another difference is bank loans are usually floating rate. So, they pay an interest rate that floats based on where interest rates are. Yesterday interest rates came down a bit, so the bank loan, the coupon that they pay comes down. Whereas a fixed rate bond, it’s fixed, so it’s just the same coupon for the whole term and the bond.