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Agree or disagree: A risky investment becomes less risky when I use debt to finance it,...

Agree or disagree: A risky investment becomes less risky when I use debt to finance it, because then the bank takes on some of my risk.

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Answer #1

A risky invesmtnet does not become less risky with the use of debt dinancing. The bank does not take up the risk associated with the investment. You are expected to pay a fixed interest rate to the financier even when you make negative returns on the investment.

Selling shares will help reduce the risk as it will be distributed amongst other sub owners of the company.

Hence, I disagree that a risky investment becomes less risky when I use debt to finance it.

Let me know in the comment section in case of any doubt.

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