Probability of default of the borrower and recovery rate

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Reference no: EM131979379

Explain why each of the statements below is True, False or Uncertain.

a. Compensating balances kept at the bank that has originated a loan help to reduce the adverse selection and moral hazard problems associated with lending.

b. If the book value of the collateral is greater than or equal to the amount of the loan, the credit risk of the lender is fully covered.

c. The market risk premium positively depends on the probability of default of the borrower and the recovery rate.

Reference no: EM131979379

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