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Structure and pricing of large bank loans

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  • James R. Booth
  • Lena Chua

Abstract

This paper examines the characteristics of large bank loans as a form of corporate finance. We compare the characteristics of a sample of these loans with private placements and public issues of debt. The unique features of large bank loans that may encourage firms to continue using this source of financing include: borrower flexibility in deciding on the timing and amount of borrowing; the use of fixed-spread floating rate of interest, flexibility of changing and renegotiating contract features, such as covenants, during the life of the contract.

Suggested Citation

  • James R. Booth & Lena Chua, 1995. "Structure and pricing of large bank loans," Economic Review, Federal Reserve Bank of San Francisco, pages 52-62.
    • Handle: RePEc:fip:fedfer:y:1995:p:52-62:n:3
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    File URL: https://fraser.stlouisfed.org/scribd/?toc_id=514308&filepath=/docs/publications/frbsfreview/rev_frbsf_1995no2.pdf&start_page=31
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    References listed on IDEAS

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    1. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    2. Avery, Robert B. & Berger, Allen N., 1991. "Loan commitments and bank risk exposure," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 173-192, February.
    3. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
    4. Mark S. Carey & Stephen D. Prowse & John Rea & Gregory F. Udell, 1993. "The economics of the private placement market," Staff Studies 166, Board of Governors of the Federal Reserve System (U.S.).
    5. Eckbo, B. Espen, 1986. "Valuation effects of corporate debt offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 119-151.
    6. Thakor, Anjan V. & Udell, Gregory F., 1987. "An economic rationale for the pricing structure of bank loan commitments," Journal of Banking & Finance, Elsevier, vol. 11(2), pages 271-289, June.
    7. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
    8. Thomas F. Brady, 1985. "Changes in loan pricing and business lending at commercial banks," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-13.
    9. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    10. Mitchell Berlin, 1986. "Loan commitments: insurance contracts in a risky world," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 3-12.
    11. Simon H. Kwan & Willard T. Carleton, 1995. "The role of private placement debt issues in corporate finance," Working Papers in Applied Economic Theory 95-13, Federal Reserve Bank of San Francisco.
    12. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
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    Cited by:

    1. Beatty, Anne & Ramesh, K. & Weber, Joseph, 2002. "The importance of accounting changes in debt contracts: the cost of flexibility in covenant calculations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 205-227, June.
    2. Kleimeier Stefanie & William L. Megginson, 2002. "An empirical analysis of limited recourse project finance," Research Memorandum 066, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    3. Rosman, Andrew J. & Bedard, Jean C., 1999. "Lenders' Decision Strategies and Loan Structure Decisions," Journal of Business Research, Elsevier, vol. 46(1), pages 83-94, September.

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    Keywords

    Bank loans ; Interest rates;

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