An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
A)adverse selection
B)moral hazard
C)risk sharing
D)credit risk

Question

Quizplus · Accepted Answer

The problem described in the scenario is an example of moral hazard. Moral hazard occurs when a party takes risks because they know that they will not bear the full costs of those risks. In this case, the corporation is using the funds raised from bonds to pay for luxury expenses instead of using those funds for their intended purpose of corporate expansion. This behavior is a form of moral hazard because the corporation is taking risks with other people's money (the bondholders) and will not face the full consequences of its actions.

An Example of the Problem of ________ Is When a Corporation