Answer to Question #237311 in Economics for Elijah Sichitalwe

Question

A company sources of long term funds include bonds, preferred stock and common stock. Identify some financing risks associated with these sources and explain how these risks affects the return expected from investments financed by these sources

Answer 1

Investment risks are understood as the reasons for the volatility of investment income. Risk is the uncertainty about the results of an investment. However, all investments are subject to various kinds of risks. The more price fluctuations, the higher the level of risk. Understanding the risks associated with various securities is very important for building a quality portfolio. Risk is probably the very factor that keeps many investors from investing in stocks and encourages them to invest in so-called safe bank accounts, certificates of deposit, and bonds. Profits from such passive savings instruments often lag behind inflation. And although investors will not lose their capital, they run the risk of earning less income from inflation and taxes than simply keeping their funds in cash and cash equivalents.