Difference Between Bond and Loan

A bond is a loanBond Is A LoanBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more used by large entities, corporations, or governments to raise capital, which they require for operating their business, and it’s done by selling IOUs to the public. The terms bond and loan are related; however, they are not the same and have specific core differences. Both are debts.

What is Loan?

A loan is a debt in which a lender will lend the money, and a borrower will borrow the money. A specific time limit will be set for the repayment of the debt-money, including the interest amount and the principal amount the borrower has borrowed from that lender. This principle amount is mostly paid in installments regularly. Every installment will be called an annuity when it is a similar amount.

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What is Bond?

Bond is commonly referred to as the fixed-income securities and is one of 3 major asset classes3 Major Asset ClassesAssets are classified into various classes based on their type, purpose, or the basis of return or markets. Fixed assets, equity (equity investments, equity-linked savings schemes), real estate, commodities (gold, silver, bronze), cash and cash equivalents, derivatives (equity, bonds, debt), and alternative investments such as hedge funds and bitcoins are examples.read more that individual investors are usually most familiar with, along with stocks (i.e., equities) and cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market..read more. Many government and corporate bondsCorporate BondsCorporate Bonds are fixed-income securities issued by companies that promise periodic fixed payments. These fixed payments are broken down into two parts: the coupon and the notional or face value.read more are publicly traded; others are traded only over-the-counter (i.e., OTC) or privately between the lender and the borrower.

Bond vs. Loan Infographics

Critical Differences Between Bond and Loan

  • The main difference is that a bond is highly tradeable. If you purchase a bond, there is usually a marketplace where you can trade it. It means you can sell the bond rather than wait for the thirty years’ end. In practice, people purchase bonds when they wish to increase their portfolio in that way. Loans tend to be agreements between borrowers and banks. Loans are generally non-tradeable, and the bank will be obliged to see out the entire term of the loan.In the case of repayments, bonds tend to be only repaid in full at the bond’s maturity – e.g., 10, 20, or 30 years. Banks may expect the repayment of principal and interest during the repayment period at regular intervals.The US and the UK Government bonds are perhaps treated as low-risk. Interest rates on government bonds are generally lower. Private loans on unsecured debt, on the other hand, are likely to attract a higher rate of interest. Corporate bonds are mostly somewhere in between – depending upon the reputation of the corporate.Issuing bonds give the corporates greater freedom to operate as they deem fit because it frees them from the restrictions often attached to the banks’ loans. Consider, for example, that lenders or the creditors often require corporates to agree to various limitations, such as not to issue more debt or not to make corporate acquisitions until their loans are repaid entirely.The rate of interest that the companies pay the bond investors is often less than the rate that they would be required to pay to obtain the loan from the bank.Bonds that are traded in the market do possess credit rating, which is issued by the credit rating agencies, which starts from investment grade to speculative grade, where investment-grade bonds are considered low risk and usually have low yields. In contrast, speculative bonds are considered of higher risk; hence, they are traded at higher yields to compensate the investors for the risk premiumThe Risk PremiumRisk Premium, also known as Default Risk Premium, is the expected rate of return that the investors receive for their high-risk investment. You can calculate it by deducting the Risk-Free Investment Return from the Actual Investment Return. read more. On the contrary, a Loan doesn’t have any such concept; instead, the creditworthinessCreditworthinessCreditworthiness is a measure of judging the loan repayment history of borrowers to ascertain their worth as a debtor who should be extended a future credit or not. For instance, a defaulter’s creditworthiness is not very promising, so the lenders may avoid such a debtor out of the fear of losing their money. Creditworthiness applies to people, sovereign states, securities, and other entities whereby the creditors will analyze your creditworthiness before getting a new loan.read more is checked by the creditor.

Comparative Table

Conclusion

Loans are a debt in which a lender will lend the money, and a borrower will borrow the money. A specific time is set for the repayment of the debt-money, which includes the interest and the principal amount borrowed by the corporate or any individual borrower from the lender; a bond, on the other hand, is a type of loan also known as debt security. In the case of bonds, the public is the creditor or the lender, and big corporations or the government are usually the borrowers.

Loans are not usually tradeable, as mentioned earlier, whereas bonds have a market where they can be traded before the bonds are matured.

Bond vs. Loan Video

This article has been a guide to Bond vs. Loan. Here we discuss the top difference between Bond and Loan, infographics, and a comparison table. You may also have a look at the following articles –

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