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:

Fraudulent Practices

Actions intended to deceive others for personal gain or advantage, often violating legal or ethical standards.

Iroquois

A historically powerful and important northeast Native American confederacy, known as the Haudenosaunee, consisting of six nations: the Mohawk, Onondaga, Oneida, Cayuga, Seneca, and Tuscarora tribes.

William Penn

An English Quaker leader and founder of Pennsylvania, a colony established as a place of religious freedom for Quakers and other persecuted religions.

Walking Purchase

A 1737 agreement between the Penn family, the proprietors of Pennsylvania, and the Lenape Indians, which fraudulently expanded Pennsylvania territory by utilizing a forged document.