In 1998, the Syndicated Bank Loan market (defined as loans having more than two bank lenders) was a vast and cheap source of debt financing for U.S. corporations. This market was characterized by a large number of financial institutions that aggressively committed capital to debt issuers as a way to build market share and increase earnings. Over the next three years, however, syndicated loan prices increased dramatically while the quantity of these loans declined. The price increase, measured as a markup over the cost of funds or LIBOR (London Interbank Offered Rate), is illustrated in the figure labeled €œAll-In Drawn Pricing.€ For example, the price to BBB-rated companies rose from 37.5 basis points in 1998 to approximately 129 basis points in 2002. This is a 244% increase in the price or spread. Explain these changes using shifts in demand and/or supply.

Over the sametime period, in a related lending market, asset-backed commercial paper, we see a huge quantity increase as shown in the €œAsset-Backed Commercial Paper€ graph. Did prices for these loans increase or decrease? Justify your answer using shifts in supply and demandcurves.

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All-In Drawn Pricing (ncluding Usage Fees 150 130 - 110- 90- 70- 50 30 10 1098 3098 1099 3099 1 3000 1001 3001 1002 8/12/2002 or Broadly Syndicated Loans Maturing in 2-5Yeas Based on 5SP Senior Debt Ratings Asset-Backed Commercial Paper 800 $694 700 $642 600 $521 S 500 $382 드400- 300 $256 200 152 nl $107 100 S1 $4 s7 12 S15 $30 $45 s47 $58 $71