Adverse Selection Is a Problem Associated with Equity and Debt

question 29

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 percent 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:

Present Intent

Present intent is a legal term referring to a person's immediate intention or determination to perform a particular act or to enter into a contract at the current moment.

Delivery

The process of transferring goods from one party to another.

Personal Property

Tangible or intangible items that belong to an individual or business, excluding real estate.

True Owner

The individual or entity that holds the legitimate rights to ownership or possession of property.