Final answer:
Banks prefer lending to well-established firms as they pose lower risks of default, reflecting the firms' higher profitability and stronger financial records. Well-established firms often raise large capital through bonds, while bank loans are more suited for smaller, closely monitored firms. Interest rates also influence the attractiveness of loans and bonds.
Step-by-step explanation:
Banks are generally more willing to lend to well-established firms because they pose lower risks of default. When a firm has a record of high profits, this indicates a strong ability to repay loans, making such a firm a more attractive borrower. Established firms may offer bonds as a way to raise large amounts of financial capital for their ventures, which often includes investments or the acquisition of other firms. In contrast, smaller firms may find bank borrowing more suitable due to the customized nature of such loans, with banks being able to closely monitor the firm's financial activities.
In times of fallen interest rates in the economy, loans previously made at higher rates become more valuable, increasing the attractiveness of established firms' bonds. Overall, the relationship between banks and firms of various sizes is dynamic and can vary based on several economic factors.