Solutions to the Moral Hazard Problem Include

question 19

Multiple Choice

Solutions to the moral hazard problem include

• A) high net worth.
• B) monitoring and enforcement of restrictive covenants.
• C) greater reliance on equity contracts and less on debt contracts.
• D) all of the above.
• E) only A and B of the above.

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Definitions:

Future Cash Flows

Projected financial gains or losses for a specific period in the future.

Financial Advisors

Professionals who help individuals manage their finances by providing advice on money issues such as investments, insurance, mortgages, college savings, estate planning, taxes, and retirement.

Collateral

Assets that a borrower offers to a lender as security for a loan, which can be seized if the loan is not repaid according to the agreed upon terms.

Cash Flows

The full extent of money transactions processed by a business, considerably affecting its ability to liquidate assets.