What Is Adverse Selection

question 106

Multiple Choice

What is adverse selection?

• A) It refers to the private, self-interested actions that people pursue, which, when taken collectively, lead to a loss in economic surplus.
• B) It refers to the actions people take after they have entered into a transaction that make the other party to the transaction worse off.
• C) It refers to the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
• D) It refers to the actions people take before they enter into a transaction so as to mislead the other party to the transaction.

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Definitions:

Contingent Asset

A possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Convertible Notes

A financial instrument issued by companies that can be converted into equity, usually at the discretion of the holder or at specific future events.

Interest Expense

The cost incurred by an entity for borrowed funds, representing the price paid for the use of a lender's money or credit.

Ordinary Shares

Equity shares that represent ownership in a company and give the holder voting rights and a share in the company’s profits through dividends.