Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models?
A. Reputation is an implicit contract regarding borrowing and repayment that extends beyond the formal explicit legal contract.
B. A borrower's leverage ratio is positively related to the probability of default over all levels of debt.
C. Firms with high earnings variance are less attractive credit risks than those firms that have a history of stable earnings.
D. Loans can be collateralized or uncollateralized.
E. Reputation is a key reason why initial public offering of debt securities by small firms have a higher interest rate than do debt issues of more seasoned borrowers.
Ans: B. A borrower's leverage ratio is positively related to the probability of default over all levels of debt.
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