2. Agency conflicts between shareholders and creditors While the agency conflicts between managers and shareholders tend to receive the most press, they are not the only type of agency conflict affecting the modern corporation. Another equally important type of agency conflict is sometimes observed between a firm's common shareholders and its creditors, or bondholders. As with conflicts between managers and shareholders, the basis of conflicts between shareholders and bondholders is divergent concerns and motives. In general, bondholders purchase corporate securities that provide a return, whereas shareholders purchase shares that are likely to provide a return that the riskiness of the firm. If managers undertake projects that decrease the riskiness of the firm and its cash flows, then the wealth of the firm's bondholders will be while that of the firm's shareholders will be Agency conflicts between shareholders and creditors Bordholders often employ a variety of devices including restrictive covenants in the company's bond indenture agreements-to protect their interests and constrain the actions of shareholders and the firm's managers. Which of the following are restrictive covenants often used to protect the firm's bond value and bondholder wealth? Check all that apply. Provisions that require issuing new debt securities whenever interest rates drop below 5% Provisions that prohibit reducing the firm's liquidity ratio below specified levels provisions that prohibit the borrower from increasing debt ratios above specified levels Provisions that require firing the firm's CEO whenever the firm's bond price decreases by more than 15% In addition, potential bondholders may require a Interest rate on the firm's 5000 to be issued bond as compensation for the risks that cannot be adequately protected against using the restrictive covenants ometimes observed between a firm's common shareholders and its rs, the basis of conflicts between shareholders and bondholders is securities that provide a return, whereas shareholders the risking rm. fixed cash flows, then the wea variable rm's bondholders will be nts in the company's bond indenture agreements-to protect their interests m's bond value and bondholder wealth? Check all that apply. rest rates drop below 5% pecified levels above specified levels bond price decreases by more than 15% ate on the firm's soon-to-be-issued bond as compensation for the risks that olders and creditors agers and shareholders tend to receive the most press, they are not the only ly important type of agency conflict is sometimes observed between a firm's cc icts between managers and shareholders, the basis of conflicts between share neral, bondholders purchase corporate securities that provide a ide a return that the riskiness of the firm. fluctuates with ecrease the riskin ws, then the wealth of the firm's m's shareholders remains fixed regardless of olders and creditors of devices-induding restrictive covenants in the company's bond indenture agreem ders and the firm's managers. covenants often used to protect the firm's bond value and bondholder wealth2 Chec ning new debt securities whenever interest rates drop below 5% ducing the firm's liquidity ratio below specified levels e borrower from increasing debt ratios above specified levels ing the firm's CEO whenever the firm's bond price decreases by more than 15% may require a interest rate on the firm's soon-to-be-issued bond as compe ainst using the restrictive covenants. Saria eholders ter the modern corporation. Another equally important type of agency creditors, or bondholders. As with conflicts between managers and divergent concerns and motives. In general, bondholders purchase purchase shares that are likely to provide a return that If managers undertake projects that decrease the riskiness of the fir while that of the firm's shareholders will be 7 increased licts between shareholders and creditors decreased pften employ a variety of devices-including restrictive co and constrain the actions of shareholders and the firm's managers. Which of the following are restrictive covenants often used to protect th O Provisions that require issuing new debt securities whenever Provisions that prohibit reducing the firm's liquidity ratio below Provisions that prohibit the borrower from increasing debt ratio Provisions that require firing the firm's CEO whenever the firm's In addition, potential bondholders may require a interest rat cannot be adequately protected against using the restrictive covenants. cant type of agency conflict is sometimes observed between a firm's een managers and shareholders, the basis of conflicts between shar ndholders purchase corporate securities that provide a urn that the riskiness of the firm che riskiness of the firm and its cash flows, then the wealth of the firm eholders will be d creditors decreased increased including restrid ts in the company's bond indenture agreer the firm's managers. Es often used to protect the firm's bond value and bondholder wealth? Che Hebt securities whenever interest rates drop below 5% e firm's liquidity ratio below specified levels r from increasing debt ratios above specified levels n's CEO whenever the firm's bond price decreases by more than 15% e a interest rate on the firm's soon-to-be-issued bond as comp the restrictive covenants