Bow Tie Loan


DEFINITION of 'Bow Tie Loan'

A short-term, variable-rate loan in which unpaid interest charges above a predetermined interest rate are deferred. A variable-rate loan is a loan in which the interest rate fluctuates in response to market interest rates. So, when bow tie loans are issued, a predetermined interest rate is set and whenever the market rate goes up past that rate, interest payments for investors are deferred until the end of the loan's maturity.


For example, let's say a company wants to take out a bow tie loan of $100,000, current interest rates are 15% and the lending company has set a limit interest rate of 22%. At 22%, the company is paying $22,000 in interest payments. In the event that interest rates rise above 22% to, say, 26%, the interest payments will rise from $22,000 to $26,000. In this case, the company is still liable for $22,000 of interest payments, but the difference of $4,000 ($26,000 - $22,000) is deferred until the loan's maturity date.

  1. Repayment

    The act of paying back money previously borrowed from a lender. ...
  2. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
  3. Loan

    The act of giving money, property or other material goods to ...
  4. Term Loan

    A loan from a bank for a specific amount that has a specified ...
  5. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  6. Securities-Based Lending

    The practice of making loans using securities as collateral. ...
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