1) One way of describing the solution that high net worth provides to the moral hazard problem is to say that it
A) collateralizes the debt contract.
B) makes the debt contract incentive compatible.
C) state verifies the debt contract.
D) removes all of the risk in the debt contract.
2) A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a
A) collateral insurance clause.
B) prescription covenant.
C) restrictive covenant.
D) proscription covenant.
3) Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding. These clauses are
A) limited liability clauses.
B) risk insurance.
C) restrictive covenants.
D) illegal.
4) For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender.
A) monitored and enforced
B) written in all capitals
C) easily changed
D) impossible to remove