Adverse Selection Is a Problem Associated with Equity and Debt

question 65

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) none of the above.

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Definitions:

Renal Artery

The renal artery is a blood vessel that supplies the kidneys with blood, enabling them to filter and cleanse the blood, remove waste and produce urine.

Vena Cava

A large vein carrying deoxygenated blood into the heart; there are two in humans, the superior vena cava and the inferior vena cava.

Capillaries

Microscopic blood vessels that connect arterioles and venules, facilitating the exchange of water, oxygen, carbon dioxide, and other substances between blood and tissues.

Capillaries

Tiny blood vessels that connect arterioles and venules, facilitating the exchange of water, oxygen, carbon dioxide, and many other nutrients and waste substances between blood and tissues.