The bonded loan is legally a loan and not a security like a corporate bond, but it combines the economic advantages of capital markets instruments with the favorable legal requirements of loans.

The bonded loan allows use of the capital markets, since typically institutional investors like insurance companies, pension funds, public bodies and credit institutions seek investments in this instrument. Often the transaction volume for a bonded loan is comparable to a corporate bond. Bonded loans have relatively short and standardized documentation with a promissory note attached. The promissory note is not a security but provides evidence that the loan has been paid out. Comparable to securities, the promissory note is handed over when the bonded loan is transferred to a new investor. Together with the loan documentation, this makes it comfortable to trade the bonded loan.

A typical bonded loan transaction is arranged by a bank which structures the bonded loan and places it on a best effort basis with interested institutional investors. The structuring includes the agreement on the terms of the loan. A typical bonded loan has a term between three and 10 years, is repayable in one amount at the end of its term, is unsecured and is transferrable for the investor. The coupon may be fixed or variable and in some cases structured. It is also not uncommon to split the bonded loan into several tranches with different terms and coupons. The documentation is lean but derived from large syndicated loan documents. The initial lender is the arranging bank but the investor is identified beforehand and the bonded loan is transferred to them immediately after signing and once the respective funds have been provided by the investor.