Adverse Selection Is a Problem Associated with Equity and Debt

question 87

Multiple Choice

Adverse selection is a problem associated with equity and debt contracts arising from ________.

• A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities
• B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults
• C) the borrower's lack of incentive to seek a loan for highly risky investments
• D) the borrower's lack of good options for obtaining funds

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Definitions:

Elastic Vessels

Blood vessels, such as arteries, that contain elastic fibers in their walls allowing them to stretch and recoil, aiding in the maintenance of blood pressure.

High Pressure

A condition where the force exerted by a fluid (such as blood or air) against the walls of its container (such as blood vessels or airways) is greater than normal.

Arteries

Blood vessels that carry oxygen-rich blood away from the heart to the body's tissues.

Distributing Arteries

Arteries that branch from larger arteries to distribute blood to various parts of the body.