Because Larger Loans Create Greater Incentives for Borrowers to Engage

question 57

Multiple Choice

Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans,banks

• A) ration credit, granting borrowers smaller loans than they have requested.
• B) ration credit, charging higher interest rates to borrowers who want large loans than to those who want small loans.
• C) ration credit, charging higher fees as a percentage of the loan to borrowers who want large loans than to those who want small loans.
• D) do none of the above.

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Definitions:

Method

A systematic way or approach used to accomplish a task or solve a problem, often applied in research, analysis, or strategic planning.

Capital Rationing

A strategy or situation where a company limits its new investments or projects due to constraints on available financial resources.

Capital Investment Analysis

The process of assessing the viability and potential return on investments made in long-term assets.

Internal Rate of Return Method

A capital budgeting method used to estimate the profitability of potential investments.