Examlex
Which of the two bonds in each example would you expect to generally pay the higher interest rate? Explain why.
a.a U.S.government bond or a Venezuelan government bond
b.a U.S.government bond or a municipal bond with the same term and issued by a creditworthy municipality.
c.a 6-month Treasury bill or a 20-year Treasury bond
d.a Microsoft bond or a bond issued by a new recording company
Adverse Selection
A situation in which asymmetrical information leads buyers or sellers to make counterproductive choices, often observed in insurance markets.
Asymmetric Information
A situation in which one party in a transaction has more or better information than the other party, often leading to an imbalance in power and possibly making the transaction inefficient.
Economic Transaction
An exchange or transfer of goods, services, or funds between parties.
Diversification
An investment strategy that involves spreading investments across various assets to reduce risk.
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