Assignment

In your own words, please explain. No word minimum.

1) The two main sources of financing for a business are debt and equity. The biggest risk with debt is that the company will not be able to repay it. Because terms and cash flows can be varied, bonds are a more flexible source of debt financing than mortgage loans. Enron is a company that used creative accounting to show reduced debt on its balance sheet. This is known as "off balance sheet financing". Please explain "off balance sheet financing.

2) One of the risks of borrowing money is changing interest rates. For example, if a company issues bonds when the market rate is 7%, what happens if the market rate goes down while the bonds are outstanding? Name some actions a company could take to control this risk.