IG Bonds vs Term Loans vs Equity, Explained
The question
Why would a company issue investment-grade bonds instead of (a) drawing a bank term loan or (b) issuing equity? Give the key tradeoffs for each comparison.
General educational practice only. This is not an actual, confidential, leaked, or firm-provided interview question. Check important technical details against primary learning materials.
The answer
A company issues investment-grade bonds instead of drawing a bank term loan primarily because bonds give it fixed-rate, long-tenor, bullet money, which locks in cheap funding without amortization and with very thin covenants. That structure lets a blue-chip issuer build a liability ladder, say with 10- and 30-year tranches, and avoid floating-rate exposure or refinancing risk embedded in a shorter-term loan.
A bank term loan is floating, often secured, and prepayable, so bank credit suits flexible shorter-term needs, the same family as revolvers and bridge facilities, rather than locked-in long-term funding. Compared to issuing equity, debt is simply cheaper: interest is tax-deductible, the pretax cost of debt sits well below the cost of equity, and it is non-dilutive, preserving ownership.
That lowers the company’s weighted average cost of capital, up to a point. The clear tradeoff is that bonds create fixed obligations and add financial risk, which equity does not. So an investment-grade bond fits when a company wants to finance itself with long, covenant-light, fixed-rate money while keeping its shareholder base intact.
Yield curve: normal vs. inverted
Also asked as
- What does a DCM desk actually do for an investment-grade corporate issuer, and how do its economics (fees, volume, margin) differ from a leveraged finance desk?
- Decompose the yield on an investment-grade bond. If the 5-year Treasury yields 4.05% and a single-A issuer prints at T+80, what is the reoffer yield, and what risks is that 80 bps spread mainly compensating for?
- Walk through the arc of a new IG bond deal from Initial Price Thoughts to the break to trade. Define oversubscription, guidance tightening, and new-issue concession as you go.
- A deal opens at IPTs of T+140 area, builds a $4.0bn book against a $1.0bn target, and prints at T+108, upsized to $1.25bn. Compute the spread compression, the coverage ratio at launch size, and the annual interest saved versus IPT. What does this tell you about market conditions?
- Explain new-issue concession using an issuer whose existing curve is at T+88. It prints a new 10-year at T+95 and it breaks to T+90. Was the deal priced well? What would printing at T+86 and then trading to T+98 have told you?
- What is a make-whole call, why is it effectively investor protection rather than a cheap refinancing tool, and how does a par call window near maturity change that? Why do IG bonds also commonly include a change-of-control put at 101?
- A BBB− issuer needs to raise $1bn but is worried about being downgraded to high yield. Explain how a hybrid security helps, quantify the leverage benefit if agencies give it 50% equity credit on a $1bn issue when the company has $6bn of existing debt and $1.2bn of EBITDA (compare leverage with a straight bond vs the hybrid), and state the risks of relying on the equity credit.
- A US single-A issuer can print 7-year USD debt at T+115 with the 7-year Treasury at 4.20%. Alternatively it issues in euros at Bund+90 (7-year Bund 2.35%) and swaps back to dollars, where the swap converts the euro fixed liability into an all-in USD fixed cost of 4.88%. Compute both all-in USD costs, the savings in bps and dollars per year on $1bn, name the single factor the trade depends on, and explain what reverses it.
- An acquirer signs a $3bn acquisition funded with committed bridge financing, intending to term it out with bonds. Between signing and closing, Treasuries rise 90 bps and IG spreads widen 60 bps. Walk through what the bridge protects, why it exists in the first place, how the changed market affects the permanent financing and the deal's accretion, and what step-up/duration fees on the bridge are designed to do.
Practice this topic with rubric-grounded grading inside IB Atlas.
Start freeGet all 125 practice prompts as one PDF.
General educational prompts with study explanations for offline review. They are not firm-provided or confidential questions.
Keep going
The rest of this topic
Rates, the curve and raising capital