Debt is _____ but is more _____ for a business because the payment of interest and the return of principal is obligatory for the business.

Cheaper, risky

The correct answer is Option (1) → Cheaper, risky.

Debt is cheaper but is more risky for a business because the payment of interest and the return of principal is obligatory for the business. Any default in meeting these commitments may force the business to go into liquidation. There is no such compulsion in case of equity, which is therefore, considered riskless for the business. Higher use of debt increases the fixed financial charges of a business. As a result, increased use of debt increases the financial risk of a company.