Question

City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company’s chances for success are dubious, but City Bank makes the loan anyway because it believes that the government will bail it out if SheetOil goes bankrupt and cannot repay the loan. City Bank’s decision to make the loan has been affected by:__________.

A. Liquidity
B. Moral hazards
C. Token money
D. Securitisation

Answer 1

The correct option is B,moral hazards

Step-by-step explanation:

Securitisation implies the a situation a guarantee against a loan is given by another party or even the borrower by using an asset as a collateral for the sum borrowed.In this case, the government has not given any form of security against SheetOil's loan.

Liquidity is the need to access cash in order to be able to discharge business obligations,hence option A is wrong.

Moral hazards is the tendency to take risks as an incentive to improve business performance,it is clear that City Bank is aware that loan might turn bad but still went in sealing the deal with SheetOil.