Although restrictive covenants can potentially reduce moral hazard,a problem with restrictive covenants is that
A) borrowers may find loopholes that make the covenants ineffective.
B) they are costly to monitor and enforce.
C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts.
D) all of the above.
E) only A and B of the above.

Question

Quizplus · Accepted Answer

Choice A is correct because borrowers may find loopholes or ways to circumvent the restrictions, rendering the covenants ineffective. Choice B is also correct because monitoring and enforcing restrictive covenants can be costly for the lender or debtholder. However, choice C is not a valid concern because it does not diminish the benefits of the covenants. Hence, the correct answer is E.

Although Restrictive Covenants Can Potentially Reduce Moral Hazard,a Problem with Restrictive