The use of collateral A. allows banks to charge higher interest rates on loans. B. makes it more costly for borrowers to take advantage of their asymmetric information. C. makes it more costly for lenders to take advantage of their asymmetric information. D. has important tax implications for both borrowers and lenders.

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Business

Kale Chapman

16 January, 17:17

The use of collateral A. allows banks to charge higher interest rates on loans. B. makes it more costly for borrowers to take advantage of their asymmetric information. C. makes it more costly for lenders to take advantage of their asymmetric information. D. has important tax implications for both borrowers and lenders.

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Kaiya Pittman · Answer 1

The correct answer is B. The use of collateral makes it more costly for borrowers to take advantage of their asymmetric information.

Explanation:

In finance, a collateral or guarantee is a transferable asset or a surety, or even a promise of guarantee, used to cover the credit risk during financial transactions in the event that the borrower cannot meet his payment obligations.

A secured loan means a loan in which the borrower commits certain assets as a guarantee of credit, this the latter then becoming a partially secured debt for the creditor who made this loan.

The guarantee may consist of cash (pledge of cash account in retail bank, cash-collateral in investment bank) or securities.

Another form consists of a simple commitment: commitment by signature of a bank towards its client, promise of collateral or mortgage, letter of intent.