Because of the Lemons Problem in the Used Car Market

question 11

Multiple Choice

Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ________, which gives rise to the problem of ________.

• A) low; moral hazard
• B) low; adverse selection
• C) high; moral hazard
• D) high; adverse selection

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Definitions:

Coupon Rate

The annual interest rate paid by a bond issuer to its bondholders, expressed as a percentage of the bond's face value.

Yield To Maturity

The total return expected on a bond if held until its maturity date, including all remaining coupon payments and principal repayment.

Remaining Maturity

The amount of time left until a financial instrument, such as a bond, reaches its maturity date and the principal is due to be repaid.

Coupon Rate

The annual interest rate payable on a bond's face value by its issuer, representing the yield paid to bondholders.