What is the Difference Between Bond and Loan?

The main difference between a bond and a loan lies in the source of capital. With a loan, a financial institution acts as the lender, while bonds are issued by companies or governments, and investors provide the capital. Both bonds and loans are financial instruments that have set periods, accrue interest, and require the borrower to repay the principal. However, they work differently in several aspects:

1. Tradeability: Bonds are more tradeable than loans. If you purchase a bond, there is usually a marketplace where you can trade it, meaning you can sell the bond before it matures. Loans, on the other hand, tend to be agreements between borrowers and banks, and are generally non-tradeable.
2. Interest Rates: Bonds usually have a lower interest rate than loans, but loans can have fixed or variable interest rates that depend on the base rate. In most cases, loan interest rates are greater than bond interest rates, and if the loan is unsecured, the interest rate will be substantially higher.
3. Repayment: Bonds are typically repaid in full at the bond's maturity, while loans have monthly payments that do not fluctuate with the market. When a company issues a bond, it promises to pay back the face value on a certain date, known as the maturity date.
4. Flexibility: Companies have more flexibility in how they issue a bond, the terms, and where the finances go, whereas loans can include restrictions that require the company to use the funding for specific purposes.

In summary, bonds are debt instruments issued by governments or corporations to raise funds, with investors providing the capital, while loans are lump-sum amounts extended by financial institutions to individuals or businesses. Bonds are more tradeable and usually have lower interest rates, while loans offer more flexibility in terms of repayment and can have variable interest rates.

Comparative Table: Bond vs Loan

Here is a table comparing the differences between bonds and loans:

In summary, bonds are debt instruments issued by governments or corporations to raise capital, while loans are provided by financial institutions to individuals or corporates. Bonds are tradeable and generally have longer payment periods, while loans are non-tradeable and tailored to the borrower's needs.