To Reduce Moral Hazard Problems,banks Include Restrictive Covenants in Loan

question 108

Multiple Choice

To reduce moral hazard problems,banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective,banks must also

• A)monitor and enforce them.
• B)be willing to rewrite the contract if the borrower cannot comply with the restrictions.
• C)trust the borrower to do the right thing.
• D)be prepared to extend the deadline when the borrower needs more time to comply.

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Definitions:

Monetary Compensation

Financial payment provided to workers for their labor, including salaries, wages, bonuses, and benefits.