a long position in a risk-free bond & a short put? I can’t get my mind around this one.
I think they sort of say (well, is the answer to a sample exam 08, so they better be right about this) that you can buy a risk free bond, which will not pay the extra yield of a corporate bond, and instead “get” that extra yield selling a put (on the company´s stock???). If the company is having problems and the stock goes down, as you sold the put, you will experience a loss “similar” to the one that a corporate bond would experience have serious doubts this can be exactly like that in the real world, anyway
Long position in risk free bond + sell CDS protection = long corporate bond (sort-of) Long position in risk free bond + short equity put = some capital structure trade sort-of like above.
But this is from the vantage point of the borrower (company), not the lender. Maybe I just read the problem wrong?
No, you read the problem correctly. The problem is that cfa wording for the question is different than the one they use for the answer. I remember the question was something like “issuing debt for a company can be modeled as…” or something like that, which sounds like looking at it from the perspective of the company. But, in the answer, they look at it from the perspective of the buyer of the company´s bond (ie, the lender). Don´t waste your time with misleading questions/answers. Actually, if you have doubts because of their wording, this means you know the stuff. At least that is what I say to myself in these cases 
hala_madrid Wrote: ------------------------------------------------------- > No, you read the problem correctly. The problem is > that cfa wording for the question is different > than the one they use for the answer. > > I remember the question was something like > “issuing debt for a company can be modeled as…” > or something like that, which sounds like looking > at it from the perspective of the company. But, in > the answer, they look at it from the perspective > of the buyer of the company´s bond (ie, the > lender). > > Don´t waste your time with misleading > questions/answers. Actually, if you have doubts > because of their wording, this means you know the > stuff. At least that is what I say to myself in > these cases ya, ya made same mistake, misleading wording
Corporate Bondholder with CREDIT RISk perspective (i.e. buyer of the bond, lender of the cash) is equivalent to Long a risk free asset + short a put. short a put takes premium (extra yield) but obligated to buy stock at higher price when stock price falls i.e. loss (credit risk) on profitable scenario.