Moral Hazard Problems Arise Because

question 13

Multiple Choice

Moral hazard problems arise because:

• A) lenders cannot distinguish good from bad risks.
• B) borrowers have incentives to act in ways that do not reflect the lender's interest.
• C) firms hire incompetent employees.
• D) lenders charge interest rates that are too low.

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Definitions:

Complex Capital Structures

Refers to corporate financial structures that feature a mix of simple and intricate financial instruments, such as multiple classes of stock or convertible bonds.

Cash Dividend

A distribution of a company's profits to its shareholders in the form of cash.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations with its current assets.

Convertible Bonds

Bonds that can be converted into a predetermined number of the issuing company's shares at certain times during its life, usually at the discretion of the bondholder.