Requiring collateral reduces the probability of default after a loan is made, by giving borrowers the incentive to act prudently in order to avoid the loss of collateral, which reduces:
A)adverse selection.
B)moral hazard.
C)interest rate risk.
D)bank panics.

Question

Quizplus · Accepted Answer

Requiring collateral reduces moral hazard, as borrowers have the incentive to act prudently in order to avoid losing their collateral. It does not directly address issues of adverse selection, interest rate risk, or bank panics.

Requiring Collateral Reduces the Probability of Default After a Loan