Which statement best distinguishes term loans from high-yield bonds?

Which statement best distinguishes term loans from high-yield bonds?

• A. Term loans are unsecured and fixed-rate; HY bonds are secured and floating-rate
• B. Term loans have no covenants; HY bonds are covenant-heavy
• C. High-yield bonds are typically unsecured and higher-yield; term loans are secured and covenanted
• D. Term loans are never used in LBOs

Answer: (C)

The main idea here is how secured debt, covenants, and risk/return profiles differ between term loans and high-yield bonds. Term loans are typically senior secured debt backed by collateral, and they come with a robust set of covenants that constrain the borrower’s actions to protect lenders. They are often structured with floating interest rates, aligning with bank lending practices and lowering initial cost of capital for lenders who have collateral to seize if needed. High-yield bonds, by contrast, are below-investment-grade and are usually unsecured (or subordinated to secured debt), so they carry higher risk. To compensate for that risk, they deliver higher yields, and while they do have covenants, these tend to be lighter than those on term loans. So the statement that high-yield bonds are typically unsecured and higher-yield, while term loans are secured and covenanted, captures the usual contrast between these two sources of leverage. In practice, this distinction helps explain why a deal might use senior secured term loans for protection and control, with high-yield bonds serving as a later, more expensive layer of funding.

The main idea here is how secured debt, covenants, and risk/return profiles differ between term loans and high-yield bonds. Term loans are typically senior secured debt backed by collateral, and they come with a robust set of covenants that constrain the borrower’s actions to protect lenders. They are often structured with floating interest rates, aligning with bank lending practices and lowering initial cost of capital for lenders who have collateral to seize if needed. High-yield bonds, by contrast, are below-investment-grade and are usually unsecured (or subordinated to secured debt), so they carry higher risk. To compensate for that risk, they deliver higher yields, and while they do have covenants, these tend to be lighter than those on term loans. So the statement that high-yield bonds are typically unsecured and higher-yield, while term loans are secured and covenanted, captures the usual contrast between these two sources of leverage. In practice, this distinction helps explain why a deal might use senior secured term loans for protection and control, with high-yield bonds serving as a later, more expensive layer of funding.