An Example of the Problem of ________ Is When a Corporation

question 126

Multiple Choice

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.

• A)adverse selection
• B)moral hazard
• C)risk sharing
• D)credit risk

---

Definitions:

Bond Premium

The amount by which the market price of a bond exceeds its principal amount or face value, often occurring when the bond's interest rate is higher than the current market rate.

Acquisition Differential

The difference between the purchase price of an acquired company and the fair value of its identifiable net assets, often accounted for as goodwill or amortized over time.

Impairment Losses

Financial losses recognized when the carrying amount of an asset exceeds its recoverable amount, indicating the asset is not worth its current value on the balance sheet.

Consolidated Retained Earnings

Represents the cumulative amount of net income earned by a parent company and its subsidiaries over time, after dividends are paid to shareholders, consolidated to a single figure.