Why would a bank require a borrower to have collateral or a cosigner before agreeing to lend funds?

A. discourages some borrowers from asking for a loan
B. reduces risk associated with imperfect information
C. both act like a service contract in the goods market
D. complicates the process to discourage risking borrowers

B. Reduces risk associated with imperfect information.

Explanation:

The correct answer is B. Reduces risk associated with imperfect information. The bank requires a borrower to have a cosigner or collateral when lending funds to the borrower which reduces the risk of imperfect information and acts as guarantee. Cosigner is a person who is held liable if the borrower of the loan funds is unable to pay the loan amount.

The correct answer is letter "B": reduces risk associated with imperfect information.

Explanation:

Collateral is any type of property borrowers of a debt instrument have that can be taken as part of repayment if the borrower does not fulfill his payment obligation after a certain period.  

Co-signers are individuals who sign for a debt instrument along with the borrower. They become an additional source of payment and in most cases, they are helpful for the borrower to be approved in the line of credit.

Thus, collateral and co-signers are requested by financial institutions to reduce the risk the borrower will not be responsible for the debt. Optimal credit histories can be considered imperfect information since they do not guarantee a debtor will be responsible for a debt.

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