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Question 4 Consider the following numerical example for adverse selection. There are two projects A and B , and the investment of these projects are
Question Consider the following numerical example for adverse selection. There are two
projects A and B and the investment of these projects are funded by bonds. Both projects
need investment of Project A earns for sure. Project B earns with probability
and with There's an investor requiring an expected return of Answer the
following questions.
a Suppose there is symmetric information. That means the investor is able to discern
which project the fund is used to support. Which project will be financed? Why?
b Suppose there is asymmetric information, that is investor cannot tell whether the
bond is to support project or project What is the required interest rate charged
by the investor? Which project will be financed? Why?
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