Which one of the following statements is TRUE?
A) Lenders will protect themselves from the risk of asset switching by writing debt covenants into loans.
B) Lenders can't legally prevent a firm from engaging in asset switching.
C) Firms borrowing money have greater flexibility to use that money when there are debt covenants.
D) When lenders protect themselves from the risk of asset switching by charging a higher interest rate, the firm's WACC can decrease.
E) A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.

Question

Quizplus · Accepted Answer

Lenders will protect themselves from the risk of asset switching by writing debt covenants into loans. These covenants are agreements between the lender and borrower that limit the borrower’s actions, such as prohibiting the sale of assets or issuing more debt, which helps to reduce the risk of asset switching.

Which One of the Following Statements Is TRUE