By requiring borrowers to sign a covenant when getting a loan, a bank is trying to minimize:
A)high unexpected inflation.
B)moral hazard.
C)adverse selection.
D)irrational exuberance.

Question

Quizplus · Accepted Answer

By requiring borrowers to sign a covenant, the bank is trying to minimize moral hazard, which is the risk that the borrower will take actions that are not in the best interest of the lender, since they do not bear the full consequences of their actions. The covenant is a binding agreement that specifies certain terms and conditions that the borrower must follow, which helps to mitigate this risk. The other choices (A, C and D) are not relevant in this context.

By Requiring Borrowers to Sign a Covenant When Getting a Loan