Moral Hazard Is Not Eliminated in Debt Financing Because

question 32

Multiple Choice

Moral hazard is not eliminated in debt financing because

• A)borrowers have an incentive to assume greater risk than is in the interest of the lender.
• B)firms with a great deal of debt often go bankrupt.
• C)principal-agent problems are greater with debt financing than with equity financing.
• D)the use of restrictive covenants tends to increase moral hazard.

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Definitions:

Teratogens

Substances or factors that can cause congenital deformities or developmental abnormalities in an embryo or fetus.

Blastocyst

An early stage in the development of an embryo, consisting of a sphere of cells surrounding a fluid-filled cavity, before implantation in the uterus.

Ectoderm

The outermost layer of cells or tissue of an embryo in early development, which gives rise to the central nervous system, skin, and other structures.

Endoderm

The innermost layer of cells or tissue of an embryo in early development, which gives rise to the lining of some internal structures like the gut.