Which of the following are examples of debt overhang? Which examples are likely

Question

Which of the following are examples of debt overhang? Which examples are likely to lead to a cutback in spending?

a. Your uncle starts a restaurants, borrowing to fund his investment. The restaurant fails, and your uncle must shut down but still must pay his debt.
b. Your parents take out a loan to buy a house. Your father is transferred to a new city, and now your parents must sell the house. The value of the house has gone up during the time your family has lived there.
c. Your friend's parents take out a loan to buy her ea condo to live in while she is at college. Meanwhile, the housing market plummets. By the time your friends leaves college, the condo os worth significantly less than the value of the loan.
d. You finish college with an honors degree in a field with many good job prospects and with $25,000 in student loans that you must repay.

Explanation / Answer

The following are examples of debt overhang:

a. Your uncle starts a restaurants, borrowing to fund his investment. The restaurant fails, and your uncle must shut down but still must pay his debt.

c. Your friend's parents take out a loan to buy her ea condo to live in while she is at college. Meanwhile, the housing market plummets. By the time your friends leaves college, the condo os worth significantly less than the value of the loan.

Examples to lead to a cutback in spending are:

b. Your parents take out a loan to buy a house. Your father is transferred to a new city, and now your parents must sell the house. The value of the house has gone up during the time your family has lived there.

d. You finish college with an honors degree in a field with many good job prospects and with $25,000 in student loans that you must repay.

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