When a borrower uses borrowed funds to engage in activities that are detrimental to the profitability of the business venture that was financed, there is a problem of:
A) adverse selection.
B) moral hazard.
C) systematic risk.
D) risk aversion.

Question

Quizplus · Accepted Answer

This situation represents moral hazard, which occurs when a borrower takes on more risk because they are not fully responsible for the consequences of their actions, since the lender has already provided the funds.

When a Borrower Uses Borrowed Funds to Engage in Activities