Collateral Requirements Lessen the Consequences of ________ Because the Collateral

question 103

Multiple Choice

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default.

• A)adverse selection;moral hazard
• B)moral hazard;adverse selection
• C)adverse selection;diversification
• D)diversification;moral hazard

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Definitions:

Rent

Payment made by a tenant to a landlord for the use of a property.

Depreciation

The allocation of the cost of an asset over its useful life.

EBIT

Earnings Before Interest and Taxes, a measure of a company's profitability that excludes interest and income tax expenses.

Degree of Financial Leverage

A measure of a company's use of borrowed funds to finance its operations, indicating the sensitivity of its earnings to fluctuations in operational income.