Answer to Question #7426 in Finance for dina

Question

what are the pros and cons of the higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firms total dollar interest charges will be.

Answer 1

High percentage of mortgage bonds allows accumulating temporarily-free funds to provide needs of the enterprise or to make a new investment project. Moreover high percent stimulate debtors to effective activity, because they should pay more money. High percent bring investors great profit, so it is cost-effective investment. But on the other side high percentage of debt represented by mortgage bonds can lead to decline the supply for this kind of equity, because firm can’t pay for this bonds. High percent lead to great costs for enterprises, which can lead to bankruptcy. So high percentage of debt represented by mortgage bonds is multilateral phenomenon and has different consequences in different conditions.