Question

What are the differences between the term loan and a bond and Discuss advantages and disadvantages of each.

Answer 1

Difference between Loan and Bond

	Bond	Loan
Ownership	Bonds can be sold by firm or government	loan taken by consumer looking to borrow money
Interest rates	Usuaslly fixed interest rates for the period of the bond	Interest rates can be fixed but are often variable and changes with the base rates
Trading	These are often traded in the bond market	Usually fixed with the Banks
Risk	Generally low risk	Unsecured loans have very high risks

Advantages and Disadvantages of Bonds

Advantages	Disadvantages
The volatility of bonds is lower than equities	bonds are subject to various risk such as credit risk, prepayment risk etc
bonds are much safer investments than stocks	Price change in the bond will immediately affect mutual funds that hold these bonds
Bonds are often liquid	Bond holders may suffer losses if the company goes bankrupt
bonds have fixed interest payments	Bonds are callable, company can choose to payoff the bond early

Advantages and Disadvantages of Loan

Advantages	Disadvantages
They are not repayable on demand	Larger loans have certain condition which need to be adhere
Can be tied for the lifetime of the assets or equipment	Loans are not much flexible. We have to pay interest on the funds which are not in use
Interest rates may be fixed for the term	Interest rates on unsecured loans are very high
While payment of interest no need to give share of the profit	Charges are levied if loan is repayed before the end of the loan term