Discuss Two Ways in Which a Bank Can Mitigate the Problem

question 16

Essay

Discuss two ways in which a bank can mitigate the problem of moral hazard when lending money to a company.

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Definitions:

Average Investor

Typically refers to a non-professional or retail investor who participates in the markets but may not have extensive knowledge or resources.

Stock Price

The cost of purchasing a single share of a particular stock, representing the market's valuation of a company at any given time.

Common Stock Dividend

Payments made to shareholders out of a company's earnings, reflecting a portion of the profit allocated for each share of common stock.

Legal Financial Obligation

A requirement to pay money as determined by a legal process or by law.