Which of the following statements regarding collateral requirements is correct? a. Wealthy...

Question:

Which of the following statements regarding collateral requirements is correct?

a. Wealthy borrowers are more likely to meet collateral requirements of lenders, as compared to borrowers who lack wealth.

b. Borrowers who meet collateral requirements are less likely to work hard.

c. Collateral requirements signal to the lender that the project is low quality.

d. Collateral requirements increase the conflict of interest between lenders and borrowers.

Collateral Requirements

When a bank or lender gives a loan to someone else they want to reduce their risks as much as possible. One way is to demand that the borrower gives the lender some sort of asset to hold in case the borrower is unable to pay off the loan. This is known as a collateral requirement.

Answer and Explanation:

The answer is A. As stated above, a collateral requirement is the requirement by a lender that the borrow give them an asset to hold in case of default. The lender will then sell the asset to recoup some of their losses. For example, if I take out a loan for $1000 and the lender might ask for my computer for example a collateral. Usually it is not such a random item as a computer but the point still holds. Knowing this, wealthy people by definition have a lot of assets compared to those who lack wealth. This means they are more likely to have the assets needed to meet the collateral requirements set by lenders.


Learn more about this topic:

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Collateral: Definition, Types & Examples

from Introduction to Business: Homework Help Resource

Chapter 22 / Lesson 17
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