Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN: 9780357033609
Author: Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher: Cengage Learning
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Consider the benefits of financial leverage through an example involving Jason, a 25-year-old recent graduate. Jason, with a low mortgage interest rate, opts to make extra payments to pay off his mortgage early. However, the narrative questions the soundness of this decision for a young individual. The critical consideration is what Jason could do with the extra funds. Instead of expediting mortgage repayment, he could leverage the funds to acquire income-generating assets or those expected to appreciate over time. By the time Jason retires, he would possess two assets, and both the mortgage and investment loan would be paid off. Alternatively, a more conservative approach would involve investing the extra funds in the capital markets, acknowledging the associated risks for potential long-term returns.
a) How might strategically using low-interest debt to acquire income-generating assets align with or differ from the current financial approach?
b) What potential benefits and risks do you see in adopting such a strategy?
c) How can someone become aware of the fees associated with current loans, and how might a better understanding of these fees influence one’s borrowing decisions in the future?
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