Can credit risk be embedded in a stock’s price?

Say you have company A that has a decent chance of defaulting and entering bankruptcy due to insolvency issues. The unsecured debt of company A is subsequently trading at a discount to account for the credit risk. Is that credit risk ever reflected in the company’s stock price (given that once company A goes bankrupt, all equity value gets wiped out)?

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2 Comments

NP

Teller in Non-profit

2y

Equity value becomes the option value of either going bust or recovering a certain value.

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Authored by: Certified Non-profit Professional - TellerCertified Non-profit Pro

ang23455

HF

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Can credit risk be embedded in a stock’s price?

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