Question

Suppose a company is choosing between bank loans and bonds. The interest rate in the bank loan is 3.5%, and an investment bank predicted that the company will pay close to 4% to issue a bond with the same maturity. In addition, fees are estimated to be higher for the bond issuance than for the bank loan. Explain why this company may still decide to issue the bond rather than borrowing through a bank.

Answer 1

Issuing of bonds give company significant freedom to operate as compared to bank loan. Bank loan invites certain restrictions from the bank which can hamper a company's ability to do business and limits its operational options. On the other hand, bond holders do not have the power of intervening the company's operations.

Also, bank loans can be raised through bank only, whereas bonds can be raised through various financial institutions.

Also the whole principal payment of the bond is paid after the maturity period. But some banks may expect interest plus some amount of principal during repayment period.

For the above reasons, company may still decide to issue the bond rather than borrowing through a bank.