Requiring Collateral Reduces the Probability of Default After a Loan

question 63

Multiple Choice

Requiring collateral reduces the probability of default after a loan is made, by giving borrowers the incentive to act prudently in order to avoid the loss of collateral, which reduces:

• A)adverse selection.
• B)moral hazard.
• C)interest rate risk.
• D)bank panics.

---

Definitions:

Regular Course

Activities or operations that are conducted in the normal and usual manner of conducting business.

Good Faith

The sincere intention to be fair, open, and honest, devoid of any intention to defraud or seek an unfair advantage.

Negotiable Instrument

A documented pledge to pay a specified amount of money, either upon request or at a scheduled time, with the name of the person making the payment included in the document.

Fair Dealing

The principle of acting honestly and maintaining integrity in transactions, often associated with laws aimed at preventing unfair business practices.