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What are the devices available to align the interests of bondholders (debtholders) and stockholders?

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Final answer:

To align interests between bondholders and stockholders, firms use devices such as covenants, convertible bonds, and performance-based incentives to ensure management balances growth with financial stability.

Step-by-step explanation:

The question asks about the mechanisms in place to reconcile the differing interests between bondholders and stockholders within a corporation. The core issue is that bondholders are interested in the secure and timely payment of interest and principal, while stockholders often seek higher returns, possibly at higher levels of risk. To align their interests, several devices may be used:

Ultimately, these mechanisms are designed to ensure that the firm's management acts in a way that is favorable to both parties' interests, particularly focusing on sustainable growth while maintaining financial stability.

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