1) 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 inexpensive 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) they reduce the value of the debt contract.
2) Solutions to the moral hazard problem include
A) low net worth.
B) monitoring and enforcement of restrictive covenants.
C) greater reliance on equity contracts and less on debt contracts.
D) greater reliance on debt contracts than financial intermediaries.
3) A key finding of the economic analysis of financial structure is that
A) the existence of the free rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses.
B) while free rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets.
C) given the great extent to which securities markets are regulated, free rider problems are not of significant economic consequence in these markets.
D) economists do not have a very good explanation for why securities markets are so heavily regulated.