Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that
A) borrowers may find loopholes that make the covenants ineffective.
B) they are inexpensive to monitor and enforce.
C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts.
D) they reduce the value of the debt contract.
Answer: A
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