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An Empirical Analysis of the Cost of Borrowing

Author

Listed:
  • Miguel Faria-e-Castro
  • Samuel Jordan-Wood
  • Julian Kozlowski

Abstract

We empirically study firm financing costs using a comprehensive dataset of corporate bonds and bank loans. We construct a measure of the cost of financing, the Excess Debt Premium, which controls for observable debt characteristics. We document two key findings: first, bank loans are about 97 basis points cheaper than corporate bonds when controlling for observable characteristics. Second, there is significant dispersion in borrowing costs, even within the same firm and quarter. The analysis reveals that this within firm variation persists after accounting for instrument type, maturity, amount, and lender identity, suggesting substantial heterogeneity in the cost of debt across different financing instruments.

Suggested Citation

  • Miguel Faria-e-Castro & Samuel Jordan-Wood & Julian Kozlowski, 2024. "An Empirical Analysis of the Cost of Borrowing," Working Papers 2024-016, Federal Reserve Bank of St. Louis, revised 09 Dec 2025.
    • Handle: RePEc:fip:fedlwp:98542
    DOI: 10.20955/wp.2024.016
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    References listed on IDEAS

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    4. Chodorow-Reich, Gabriel & Darmouni, Olivier & Luck, Stephan & Plosser, Matthew, 2022. "Bank liquidity provision across the firm size distribution," Journal of Financial Economics, Elsevier, vol. 144(3), pages 908-932.
    5. Niels Joachim Gormsen & Kilian Huber, 2025. "Corporate Discount Rates," American Economic Review, American Economic Association, vol. 115(6), pages 2001-2049, June.
    6. Priit Jeenas, 2023. "Firm balance sheet liquidity, monetary policy shocks, and investment dynamics," Economics Working Papers 1872, Department of Economics and Business, Universitat Pompeu Fabra.
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    Keywords

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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G1 - Financial Economics - - General Financial Markets
    • H0 - Public Economics - - General

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