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:

Singular Proposition

A statement or assertion that refers to a single item or instance within a larger context.

Subject

The person, object, or concept that is being discussed or described in a sentence, book, movie, etc.

Collection

An accumulation of objects or data, often gathered or brought together based on a common criteria or interest.

Traditional Square

A logical diagram representing the logical relationships between universal and particular affirmative and negative statements.