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In one sense ____ appears surprising since it means that the bank is not ____ its
portfolio of loans and thus is exposing itself to more risk.
A) specialization in lending; diversifying
B) specialization in lending; rationing
C) credit rationing; diversifying
D) screening; rationing
Answer: A
Diff: 1 Type: MC Page Ref: 309
Skill: Recall
Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk
From the standpoint of ____, specialization in lending is surprising but makes perfect
sense when one considers the ____ problem.
A) moral hazard; diversification
B) diversification; moral hazard
C) adverse selection; diversification
D) diversification; adverse selection
Answer: D
Diff: 1 Type: MC Page Ref: 309
Skill: Recall
Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk
Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities
are called ____.
A) proscription bonds
B) restrictive covenants
C) due-on-sale clauses
D) liens
Answer: B
Diff: 1 Type: MC Page Ref: 309
Skill: Recall
Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk
To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In
order for these restrictive covenants to be effective, banks must also ____.
A) monitor and enforce them
B) be willing to rewrite the contract if the borrower cannot comply with the restrictions
C) trust the borrower to do the right thing
D) be prepared to extend the deadline when the borrower needs more time to comply
Answer: A
Diff: 1 Type: MC Page Ref: 309
Skill: Recall
Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk