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Chapter 2: Q.4 (page 96)

If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?

Short Answer

Expert verified

It will be beneficial to have bonds rather than equities.

Step by step solution

01

Step 1. Introduction

A bond is a financial instrument that allows an investor to lend money to a borrower, such as a corporation or the government. The money is used to fund the borrower's operations, and the investor is paid interest on the investment. A bond's market value might fluctuate over time.

02

Step 2. Explanation

You're probably out of luck in both, but it's better to be in bonds because they have first preference on assets. When the company restructures, you might get something back on your bonds, but with equity, you're likely to earn nothing.

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