ABSTRACT
This paper investigates the pricing of bank loans relative to capital market debt. The analysis uses a novel sample of loans matched with bond spreads from the same firm on the same date. After accounting for seniority, lenders earn a large premium relative to the bondâimplied credit spread. In a sample of secured term loans to noninvestmentâgrade firms, the average premium is 140 to 170 bps or about half of the allâinâdrawn spread. This is the first direct evidence of firms' willingness to pay for bank credit and raises questions about the nature of competition in the loan market.
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