Which statement is true about the differences between bank debt and high-yield debt?

Which statement is true about the differences between bank debt and high-yield debt?

• A. High-yield debt tends to have fixed interest rates, while bank debt usually has floating rates.
• B. High-yield debt uses maintenance covenants, while bank debt uses incurrence covenants.
• C. Bank debt is usually amortized; the entire principal is due at the end, known as bullet maturity.
• D. High-yield debt has lower interest rates than bank debt.

Answer: (C)

Covenant structure is the key difference between bank debt and high-yield debt. Bank debt typically uses maintenance covenants, which require the borrower to stay within certain financial tests at all times; if those tests are breached, the lender can declare a default. High-yield debt, on the other hand, usually uses incurrence covenants, which restrict actions only if the borrower takes a specific step (like incurring more debt or making a large acquisition). This setup gives the borrower more operating flexibility, while the lender gains protection only when those actions occur. This distinction fits why the covenants statement is the true one: it captures the fundamental risk-management approach of each lender type. Other statements mix common patterns less reliably: bank debt is typically linked to floating rates rather than fixed, high-yield debt generally carries higher yields rather than lower, and maturity/amortization patterns vary but bank debt is often amortized while high-yield debt is commonly structured as a bullet payment at maturity.

Covenant structure is the key difference between bank debt and high-yield debt. Bank debt typically uses maintenance covenants, which require the borrower to stay within certain financial tests at all times; if those tests are breached, the lender can declare a default. High-yield debt, on the other hand, usually uses incurrence covenants, which restrict actions only if the borrower takes a specific step (like incurring more debt or making a large acquisition). This setup gives the borrower more operating flexibility, while the lender gains protection only when those actions occur.

This distinction fits why the covenants statement is the true one: it captures the fundamental risk-management approach of each lender type. Other statements mix common patterns less reliably: bank debt is typically linked to floating rates rather than fixed, high-yield debt generally carries higher yields rather than lower, and maturity/amortization patterns vary but bank debt is often amortized while high-yield debt is commonly structured as a bullet payment at maturity.