Workshop 5

Question 1

Nonfinancial businesses in Germany, Japan,

and Canada raise most of their funds from

Answer 1

Bank loans

Question 2

Collateral

Answer 2

Property that is pledged to the lender in the
event that a borrower cannot make his or her debt
payment

Question 3

Collateralized debt is also know as

Answer 3

Secured debt

Question 4

Credit card debt is

Answer 4

unsecured debt

Question 5

What is moral hazard in equity contracts known as

Answer 5

Principal agent problem

Question 6

A debt contract is incentive compatible if…

Answer 6

the borrower has the incentive to
behave in the way that the lender
expects and desires, since doing
otherwise jeopardizes the borrower's
net worth in the business.
\+ 
if the borrower's net worth is
sufficiently high so that the lender's risk
of moral hazard is significantly reduced.

Question 7

What effect would interest rates have on moral hazard?

Answer 7

Increase in IR would increase Moral hazard