Financial Markets and Institutions (2-downloads)

1. Covenants to discourage undesirable behavior.

Covenants can be

designed to lower moral hazard by keeping the borrower from engaging in the

undesirable behavior of undertaking risky investment projects. Some

covenants mandate that a loan can be used only to finance specific activi-

ties, such as the purchase of particular equipment or inventories. Others

restrict the borrowing firm from engaging in certain risky business activi-

ties, such as purchasing other businesses.

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Part 3 Fundamentals of Financial Institutions