Unformatted text preview: underwriting costs and the loans are typically at lower interest rates than the bonds. Analysts say that in the event of bankruptcy, the banks would not have priority – they would be treated equally with the bondholders. Questions: 1. Why are banks suddenly going into this type of lending? 2. Why are the banks charging lower interest rates than bond holders? 3. What about credit risk? Do these seem like relatively safe or risky loans? When they lend at rates like 3.85% (an example in the article), are they charging enough to cover the credit risk? 4. What is the difference in credit risk between a direct loan to a municipality and a letter of credit (a type of loan commitment) backing a bond issue of the same municipality? 5. What do these loans imply for bank liquidity? 6. Does this seem like a good idea overall?...
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This note was uploaded on 07/02/2011 for the course FINA 465 taught by Professor Berger during the Spring '11 term at South Carolina.
- Spring '11