1) Because of the adverse selection problem,
A) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks.
B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to “skip town.”
C) lenders are reluctant to make loans that are not secured by collateral.
D) lenders will write debt contracts that restrict certain activities of borrowers.
2) Net worth can perform a similar role to ________.
A) diversification
B) collateral
C) intermediation
D) economies of scale
3) The problem of adverse selection helps to explain
A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets.
B) why collateral is an important feature of consumer, but not business, debt contracts.
C) why direct finance is more important than indirect finance as a source of business finance.
D) why lenders refuse loans to individuals with high net worth.
4) The concept of adverse selection helps to explain
A) why collateral is not a common feature of many debt contracts.
B) why large, well established corporations find it so difficult to borrow funds in securities markets.
C) why financial markets are among the most heavily regulated sectors of the economy.
D) why stocks are the most important source of external financing for businesses.