1.4.2 risk and liability

Question 1

Why do banks face risks when lending capital?

Answer 1

The capital might not be paid back, which would result in a loss for the bank.

There is also a risk that the return on an investment will be less than the expected return.

Question 2

What is unlimited liability?

Answer 2

A type of business where the owners are responsible for all of the debt and liabilities gathered by the business. It is not capped and if the business cannot meet the financial obligations, the owners’ personal assets can be taken to fulfil the debt.

Question 3

What is limited liability?

Answer 3

When the owners’ losses do not exceed the amount invested into the firm. This is an advantage of investing in a public company, since shareholders are only liable for how much they invested and not more.

Question 4

What industries is limited liability desirable in?

Answer 4

Risky ones, such as insurance, where there is the potential for a lot of loss.