Question

: Assume that you are one of the big investors of the Andy Company. Now, based on your current analysis of company’s financial performance, you are suspicious that this company will become bankrupt next year. Being an investor, which mode of financing would you choose now for further investment? Would it be desirable for you to hold bonds issued by the company or equities issued by the company? Why would you choose such option? Explain and justify your answer.                                                                                                                                          

Answer 1

If I am becoming suspicious that this company will become bankrupt next year, then I will be not doing any kind of investment into this company because I will be highly sceptical of even holding the bonds of the company at the credit risk will be very high in case the company is going bankrupt because it will not honour the payment on the maturity of the bonds and hence I will be very sceptical to invest into this company and I will rather avoid this company for investment because there will be a risk related to Capital loss.

it would not be desirable to hold Bond issued by the company or equity issued by the company because there will be risk related to to losing upon the capital because the capital will ultimately get eroded, If in case the company is going bankrupt and there are a large number of shares which are available in the market so I will be rather better to let go of them then investment into a probable bankrupt company.

I will choose not to invest into this company because if in case this company is going bankrupt then I will lose all of my investment into this company and hence first and primary goals should we protect the capital and then maximize the rate of return and hence I will not taking any risk related to loss of capital and I will avoid investing in this company.