Because of the moral hazard problem,
A) lenders will write debt contracts that restrict certain activities of borrowers.
B) lenders will more readily lend to borrowers with high net worth.
C) debt contracts are used less frequently to raise capital than equity contracts.
D) all of the above.
E) only A and B of the above.

Question

Quizplus · Accepted Answer

The moral hazard problem in finance refers to the risk that borrowers might engage in activities that are undesirable from the lender's perspective because those activities increase the likelihood of default. To mitigate this risk, lenders often impose restrictions on borrowers' activities (A) and are more inclined to lend to borrowers with high net worth because such borrowers have more to lose in case of default, making them less likely to engage in risky behavior (B). Choices A and B both address aspects of how lenders deal with moral hazard, making E the correct answer.

Because of the Moral Hazard Problem