Does Loan Size Matter In Corporate Bond ?
Usually when a corporate bond issuing company takes a loan, investors use this as a way to assess the company's value and credit rating. Whether this is positive or negative for the company actually depends on different factors like the bank's ability to assess and its reputation in the market. |
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It has been seen that when foreign banks lend to companies that are transparent, there is hardly any change in the value of the corporate bond. This is primarily because the investors already know that the company is credible and are not worried about the loan. It has also been seen that when local banks lend to companies, the same thing occurs. This could be because the local banks know the company better and can make a sound decision about the company's ability to repay the loan.
But the question is does the loan size matter in a corporate bond? The answer is yes. The loan size does make a different to the value of a corporate bond. If the amount is not too much, the bond value is not affected to a great extent. However, if the loan amount is large, investors do get nervous, especially if fear sets in that the company may not have the funds to repay the amount to the bank. This leads to many investors selling the bond before its maturity date and this, in turn, reduces the value of the bond.
Financial experts have found that the bond market is quite stable when foreign banks lend as these banks are better at monitoring and selecting their clients compared to local banks. However, at the same time, the loan size affects the corporate bond but it is not the case always.
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