Being a corporate bondholder is, in effect,

Question

Quizplus · Accepted Answer

Being a corporate bondholder is akin to owning a risk-free bond and selling a put option on the firm to the stockholders. This is because the bondholders have a fixed claim (similar to owning a risk-free bond), and if the firm performs poorly, stockholders have the option (but not the obligation) to "put" the firm to the bondholders in a default scenario, effectively making the bondholders absorb the losses beyond their fixed claim.

Being a Corporate Bondholder Is, in Effect