Term loans are debt obligations having an initial maturity between 1 and 10 years.

a. The major suppliers of term loans are banks, insurance companies, pension funds, and equipment suppliers.

b. Term loans are usually amortized over the life of the loan.

c. The interest rate on term loans obtained from commercial banks is normally greater than the bank’s prime rate.

d. Some term loans from banks require that a compensating balance be maintained at the bank. Other term loans contain a provision that gives the lender an equity participation in the borrowing company.

e. Most term loans are secured. The loan agreement contains affirmative, negative, and restrictive covenants. In addition, the conditions that determine when a default on the loan has occurred are detailed in the loan agreement. L01