Consider the effect of business cycles on bondholders versus stockholders. We expect that business cycles will affect:

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Stockholders are residual claimants, meaning they receive whatever is left after all other claims have been satisfied. Therefore, during downturns in the business cycle, they may not receive any dividends or may even experience a decrease in the value of their stock. In contrast, bondholders receive a fixed interest payment regardless of the company's profitability, making their returns more stable.

Consider the Effect of Business Cycles on Bondholders Versus Stockholders