Explain how lenders use covenants as part of loan agreements to cope with the problem of moral hazard.
Labels: Exam 2 Question 9
posted by Eschenfelder at 8:51 AM
Money and Banking Spring 2006
The following posts are the questions which appeared on last semester's exams. Students should use the comment sections to answer the questions and respond to the posts of other students.
Thursday, February 22, 2007
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1 Comments:
Lenders use covenants as part of loan agreements to cope with the problem of moral hazard by having borrowers sign contracts restricting them from taking on certain risky behavior. Because lenders do not know for sure how borrowers will use money lent to them, covenants help to protect lenders from this moral hazard.
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