The Problem of Adverse Selection Helps to Explain

question 7

Multiple Choice

The problem of adverse selection helps to explain

• A) why banks prefer to make loans secured by collateral.
• B) why banks have a comparative advantage in raising funds for American businesses.
• C) why borrowers are willing to offer collateral to secure their promises to repay loans.
• D) all of the above.
• E) only A and B of the above.

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Definitions:

Factoring Receivable

The process of selling accounts receivable to a third party at a discount to quickly generate cash.

Book Value

Book Value is the value of an asset according to its balance sheet account balance, calculated by subtracting liabilities from assets.

Inventory

The basic substances, products under manufacturing, and completed items that form part of a company's assets, which are available or will soon be available for purchase.

Source of Cash

Any activity or operation within a business that generates cash, including operations, financing, and investing activities.