Business, 09.04.2021 04:30, fluffy374747

Suppose two types of firms wish to borrow in the bond market. Firms of type A are in good financial health and are relatively low risk. The appropriate premium over the risk-free rate for lending to these firms is 2%. Firms of type B are in poor financial health and are relatively high risk. The appropriate premium over the risk-free rate for lending to these firms is 6%. As an investor, you have no other information about these firms except that type A and type B firms exist in equal numbers. A. At what interest rate would you be willing to lend if the risk-free rate were 6%?
B. Would this market function well? What type of asymmetric information problem does this example illustrate?

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Suppose two types of firms wish to borrow in the bond market. Firms of type A are in good financial...