investment mgmt -bond vs stock price

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If a stock price of a company goes up, what happens to the bond price of the company..
Does the bond price go down..If so can you kindly advise the reason....

Regards

 

[David Harper CFA FRM]

Hi vinoth, in my opinion, an answer requires many assumptions. At a superficial level, I suppose we can argue: as stock goes up, firm value goes up, and probability of default goes down as distance to default is reduced. This is a Merton model view: price of debt = risk-free debt - put on firm value, such that higher firm value decreases the value of a put, and increases the debt price.

But there are other lines of argument applying the Merton, so IMO assumptions need to be stated. Further, is the bond senior or subordinated? B/c we can frame the answer w.r.t. to interest rate dynamics, etc etc .... I think it's less about an single answer than all of the dynamics we might consider, thanks, David