A small business owner secures a loan from a bank, presenting a plan to use the funds to upgrade existing, reliable manufacturing equipment. After receiving the money, the owner considers using it instead to fund a speculative, high-risk new product line that could either yield massive profits or fail completely, leading to a default on the loan. Which economic principle best describes the risk the bank faces due to the owner's potential change in behavior?

Loan Risk Analysis

Mitigating Lender Risk

When a borrower uses a loan for a riskier venture than originally disclosed to the lender, the potential financial losses from the venture's failure are distributed equally between the borrower and the lender.

Borrower's Incentive for Risk-Taking

Evaluating a Borrower's Risky Decision

In a loan scenario where a borrower might use the funds for a riskier venture than disclosed, match each element of the situation with its correct description.

A tech entrepreneur secures a $100,000 loan from a bank to expand their existing, profitable software-as-a-service (SaaS) business. After receiving the funds, the entrepreneur identifies a new, highly speculative opportunity to invest the entire amount in developing a virtual reality application, which has a small chance of generating a massive return but a high probability of complete failure. From an economic standpoint, why might the entrepreneur be more tempted to fund the speculative ventur

Comparative Risk in Lending Scenarios

Startup Funding Risk Assessment