Question

generally receive fixed payments regardless of how the firm does, while -Select- earn higher returns when the firm's earnings are higher. Investments in -Select- ventures, that have great payoffs to stockholders if successful but threaten bankruptcy if they fail, create conflicts. In addition, the use of additional -Select- increases stockholder- debtholder conflicts. Consequently, bondholders attempt to protect themselves by including -Select- in bond agreements that limit firms' use of additional -Select- and constrain -Select- actions.

Answer 1

Bondholders generally receive fixed payments regardless of how the firm does, while Stockholders earn higher returns when the firm's earnings are higher.

Investments in risky ventures, that have great payoffs to stockholders if successful but threaten bankruptcy if they fail, create conflicts.

In addition, the use of additional debt increases stockholder- debt-holder conflicts.

Consequently, bondholders attempt to protect themselves by including covenants in bond agreements that limit firms' use of additional debt and constrain manager actions.