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ACCA Applied Skills · Financial Management · The nature and role of financial markets and institutions

A company wants to borrow 40 million for ten years. Which of the following is the main advantage to the company of borrowing through a bank intermediary rather than issuing bonds directly to many investors?

The main advantage is lower transaction and information costs: the bank appraises and monitors the borrower and can negotiate tailored terms with a single lender. It is not always cheaper, and loans usually carry covenants or security.

  1. ABank loans always carry a lower interest rate than bonds
  2. BLower issue costs and a single negotiated lender who can tailor terms, because the bank assesses and monitors the borrowerCorrect
  3. CBank loans are always unsecured, so no covenants apply
  4. DBank borrowing guarantees that the loan will be renewed on maturity

Explanation

Banks reduce transaction and information costs: they appraise and monitor the borrower and can negotiate bespoke terms with one party. Bank loans are not always cheaper, often include covenants and security, and carry no renewal guarantee, so the other options are wrong.

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