Financial system

Cost of capital

Microeconomics

Chromatography

Economics

Business

Bond market

Seniority

Political science

Monetary economics

Credit rating

Debt

Loan

Financial economics

Chemistry

Bond

Sample (material)

Finance

Profit (economics)

The Journal of Finance

ABSTRACT This paper investigates the pricing of bank loans relative to capital market debt. The analysis uses a novel sample of loans matched with bond spreads from the same firm on the same date. After accounting for seniority, lenders earn a large premium relative to the bond‐implied credit spread. In a sample of secured term loans to noninvestment‐grade firms, the average premium is 140 to 170 bps or about half of the all‐in‐drawn spread. This is the first direct evidence of firms' willingness to pay for bank credit and raises questions about the nature of competition in the loan market.

Does Borrowing from Banks Cost More than Borrowing from the Market?