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How Does the Use of Collateral and Net Worth Help

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How does the use of collateral and net worth help reduce the problem of adverse selection?


Definitions:

Unrealized Loss

An unrealized loss occurs when an asset's value decreases after it is purchased but before it is sold, reflecting a decrease in value that has not been realized through a transaction.

Fair Value

The estimated price at which an asset or liability could be exchanged between knowledgeable, willing parties in an arm's length transaction.

Income Statement

A financial statement that shows a company's revenues and expenses, culminating in a net profit or loss over a specific period.

Other than Temporary

A designation for impairments or losses that are expected to be permanent or long-lasting rather than temporary fluctuations.

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