The Problem of Adverse Selection Helps to Explain ________

question 21

Multiple Choice

The problem of adverse selection helps to explain ________.

• A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets
• B) why direct finance is more important than indirect finance as a source of business finance
• C) why collateral is not an important feature of debt contracts
• D) why banks prefer to make loans unsecured

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Definitions:

Accrued Interest Revenue

Income earned from investments that have not yet been received in cash, typically from bonds or loans, and recognized in accounting periods in which they are earned.

Depreciation Expense

The allocation of the cost of an asset over its useful life, reflecting the asset's consumption, wear and tear, or obsolescence.

Balance Sheet

A financial statement that provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time.

Adjusted Trial Balance

A list of all accounts and their balances after adjustments are made, used to prepare financial statements.