Which of the following is a factor that contributes to the c

Which of the following is a factor that contributes to the conflict of interest between a company\'s bondholders and its shareholders?

Solution

Stockholders have an incentive to take riskier projects than bondholders do. Other conflicts of interest can stem from the fact that bonds often have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely but can also be sold at any point. Bondholders may put contracts in place prohibiting management from taking on very risky projects or may raise the interest rate demanded, increasing the cost of capital for the company. Conversely, shareholder preferences–for example for riskier growth strategies –can adversely impact bondholders.