Adverse Selection Is a Problem Associated with Equity and Debt

question 30

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% loss if the borrower defaults.
• C)the borrower's lack of incentive to seek a loan for highly risky investments.
• D)the lender's inability to restrict the borrower from changing his behavior once given a loan.

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Definitions:

Business's Image

The public perception or reputation of a business, shaped by branding, marketing efforts, customer experiences, and media portrayals.

Financial Statements

Documents that provide an overview of a company's financial condition, including the balance sheet, income statement, and cash flow statement.

Operation

The day-to-day activities and procedures businesses employ to produce goods or services and function effectively.

Potential New Business

Opportunities or prospects that may lead to the inauguration or expansion of operations, representing potential sources of revenue or growth.