Question

Which of the following describes the function of a fidelity bond?

A) An insurance policy that covers theft by a bonded employee.
B) A short term investment that is secured by a bank.
C) It is a procedure to separate the duties of employees.
D) A contract between parents and their children to remain celibate.

Answer 1

A fidelity bond functions as an insurance policy that covers financial losses incurred due to theft or dishonest acts by bonded employees, thus safeguarding a business from such internal risks.

Step-by-step explanation:

The function of a fidelity bond is best described as A) An insurance policy that covers theft by a bonded employee. A fidelity bond is a form of insurance that protects a business from financial loss due to fraudulent acts committed by specified employees. It serves as a safeguard against losses from employee dishonesty and acts as a form of insurance for the employer. With this bond, the insurance firm would compensate the employer for losses incurred due to the actions of bonded employees.

Moral hazard is a situation where having insurance may lead individuals to take greater risks, believing they are protected from the consequences of their actions. However, fidelity bonds specifically mitigate this risk by providing coverage against the dishonest acts of employees, thereby promoting ethical behavior within the organization.