How does the separation of risk work

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The New Lombard Street, Merhling (2011) quotes Fischer Black(1970) in saying:

Thus a long term corporate bond could actually be sold to three separate persons. One would supply the money for the bond; one would bear the interest rate risk; and one would bear the risk of default. The last two would not have to put up any capital for the bonds, although they might have to post some sort of collateral.

How does the separation of risk work? What financial instruments are needed? Give an explanation so that someone with no training in economics could understand.

Reference no: EM13976332

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