1) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders.

1) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Adverse Selection

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1) If borrowers with the most risky investment projects seek bank loans in higher proportion to
those borrowers with the safest investment projects, banks are said to face the problem of
A) adverse credit risk.
B) adverse selection.
C) moral hazard.
D) lemon lenders.

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How is your borrowing power affected when you are considered a "high risk"? There is a good chance that you will receive better loan terms and low interest rates. You might not qualify for a loan to buy a home, car, etc. You will pay lower interest rates. None of the above.
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QuickBank has decided to lower the interest rate it charges on business loans in order to attract more business. It has succeeded in boosting the number of loan applications, but it finds that many of the applicants turn out to be very poor credit risks. This illustrates the problem known as adverse selection moral hazard the principal-agent porblem diversification
When close to the zone of insolvency, managers have an incentive to gamble. This is known as Question options: a) an agency cost of debt that covenants cannot attenuate b) an agency cost of equity known as fraudulent conveyance c) an agency cost of debt that negative covenants can attenuate d) an agency cost of debt that positive covenants can attenuate
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