Moral Hazard Is a Problem Associated with Debt and Equity

question 109

Multiple Choice

Moral hazard is a problem associated with debt and equity contracts arising from

• A) the borrower's incentive to undertake highly risky investments.
• B) the owners' inability to ensure that managers will act in the owners' interest.
• C) the difficulty lenders have in sorting out good credit risks from bad credit risks.
• D) all of the above.
• E) only A and B of the above.

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Definitions:

Voltage Measurement

The process of determining the electrical potential difference between two points in an electric circuit.

Continuity

In electrical systems, the unbroken and complete path for current flow, crucial for the safe and effective operation of circuits.

Diode

A semiconductor device that allows current to flow in one direction only, commonly used for rectification or as a check valve in electrical circuits.

Circuit Resistance

The opposition to the flow of electric current within a circuit, measured in ohms, affecting the circuit's performance and power consumption.