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3 March, 05:03

As a bank, you make a loan to an individual seeking funds to open a coffee shop. When the loan is made, the borrower uses the funds to take a vacation to Greenland. This is an example of:

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  1. 3 March, 08:31
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    Answer: Moral hazard

    Explanation:

    Moral hazard is regarded as a risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity.

    In addition to that, moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

    Themoral hazard also occurs when one party in a transaction has the opportunity to assume additional risks that negatively affect the other party.

    The decision is based not on what is considered right, but what provides the highest level of benefit, hence the reference to morality.
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