Bond vs Loan

Bonds and loans are both debts. A bond is a type of loan which is used by big corporations or governments to raise capital by selling IOUs to the general public. Though they are both debts yet they have some core differences.

Loan
Loans are a type of debt in which a lender lends the money and a borrower borrows the money. A specific time limit is set for the repayment of the debt money or the principal amount which has been borrowed by the borrower from the lender. This principal amount is usually paid in regular installments. When each installment is the same amount of money, it is called an annuity.

The main feature of a loan is that the borrower has to repay the principal to the lender as well as a certain amount of interest along with each installment. Due to the interest on the principal amount, the borrower actually has to pay some percentage of money more to the lender than the principal amount borrowed. This incentive to get more money repaid on a particular amount of money loaned makes the lenders engage in loaning money.

Financial institutions are loan providers, and it is one of their principal functions. The borrower is obligated to repay the loan and is legally bound to adhere by the contract. Loans may be monetary, or at times material loans are also lent. There are many different types of loans; secured loans, subsidized loans, unsubsidized loans, mortgage loans, recourse loans, non-recourse loans, etc.

One drawback of loans is that they cannot be traded. The bank or the lender is obliged to see that the loan term is completed by the borrower. Sometimes loans become tradeable in case of derivatives and when collateral or security is in the contract.

Bonds
Bonds are a type of loan, also called debt securities. In the case of bonds, the general public is the lender or creditor, and big corporations or the government is the borrower. The big corporations or the government, called the issuer, owe the holder of the bond, who can be any person, a debt. The issuer is obliged to repay the holder the principal amount on maturity of the bond. Maturity is the time limit that has been fixed for the repayment of the loan, and along with the repayment, each month some fixed interest is paid to the holder until the time of the maturity of the bond.

Bond money is used by the borrowers for long-term investments; governments use the bond money in financing its current expenditures. For corporations, bonds are very advantageous as the market is willing to pay corporations better rates than banks would; moreover, the corporations have more access to potential lenders.

Bonds differ from loans in the fact that they are highly tradeable. If a holder does not want to continue holding the bond until its end term, they can be traded off.

Summary:

1.Loans are a type of debt in which a lender lends the money and a borrower borrows the money. A specific time limit is set for the repayment of the debt money or the principal amount which has been borrowed by the borrower from the lender; a bond is a type of loan also called a debt security. In the case of bonds, the general public is the lender or creditor, and big corporations or the government are the borrowers.
2.Loans are not usually tradeable; bonds have a market where they can be traded before the maturity of the bond.

Sharing is caring!