1-why are standard corporate bonds not the best type of investment for young people? 2-why is...

1-why are standard corporate bonds not the best type of investment for young people?

2-why is financing your company by using high levels of debt risky? Please explain fully

Solutions

Expert Solution

Young people have a long time horizon of investment. They have a longer period in which to grow their investments. They are also not dependent on investment income for their living expenses. Thus, they have a higher ability to take risk.

The investment goal of younger people must be to accumulate a large corpus to have a comfortable retirement. Therefore, they should seek to earn higher returns to achieve this goal.

However, standard corporate bonds are of below-average risk and below-average returns. Therefore they are not suitable for young people. People of this age group must invest in higher yielding investments like equities to achieve their retirement goals.

Debt involves making fixed periodic payments.

Using high levels of debt is risky because :

During a downturn, there may not be adequate earnings/cash flows to service the debt. This increases the chances of bankruptcy
A high amount of debt payments means that the cash flows generates are used up to service debt, and little cash is left to invest in capital assets. This reduces the future growth opportunities

jeff jeffy answered 1 year ago

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