​Adverse Selection Happens Because

question 34

Multiple Choice

​Adverse selection happens because

• A)​One of the parties has more information about itself then the other party
• B)Individuals that the principle want to least select are the ones more likely to apply
• C)Parties most likely to accept an offer would be least qualified 
• D)​All of the above

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Definitions:

Interest Rates

The expense associated with obtaining a loan, or the incentive for depositing funds, usually shown as a percentage of the original amount.

Zero-Coupon Bond

A bond that does not pay periodic interest payments but is issued at a deep discount from the face value and is redeemed at the face value at maturity.

Duration

A measure of the sensitivity of the price of a financial asset or liability to changes in interest rates, often used with bonds to assess interest rate risk.

Coupon Bond

A coupon bond is a debt security that pays the holder periodic interest payments based on a fixed interest rate until the bond matures, at which point the face value is paid to the bondholder.