The methods used to reduce moral hazard in debt contracts. Concept Introduction: Moral hazard in a debt contract arises when the borrower uses the funds of the lender in such a way that it will increase the event of default. The company usually asks the investor to provide some collateral or engage in restrictive covenants to avoid such problems.

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Chapter 8, Problem 6LO

To determine

The methods used to reduce moral hazard in debt contracts.

Concept Introduction:

Moral hazard in a debt contract arises when the borrower uses the funds of the lender in such a way that it will increase the event of default. The company usually asks the investor to provide some collateral or engage in restrictive covenants to avoid such problems.

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