A Lender Who Wants to Avoid the Problem of Adverse

question 82

Multiple Choice

A lender who wants to avoid the problem of adverse selection could:

• A) charge a very high interest rate and assume all loan applicants are high risk.
• B) charge the same average interest rate to all borrowers.
• C) charge a low interest rate and make the applicant prove they warrant the low rate by providing information.
• D) only lend by issuing credit cards.

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Definitions:

Journal Entries

Recorded transactions or adjustments in the financial records of a company, marking the debit and credit of accounts affected by business operations.

Debt Ratio

A ratio indicating the level of a firm's indebtedness by dividing its total obligations by its overall assets.

Financial Leverage

The use of borrowed funds to increase the potential return on investment.

General Journal

A comprehensive journal that records the initial data for all different types of financial transactions.