Bondholders and stockholders may have interests in a corporation that conflict. Sources of conflict include:

I. dividends
II. interests
III. distortion of investment
IV. underinvestment

Correct Answer: I, III and IV.

Protective covenants in bond documents work to resolve these conflicts. 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.