Asymmetric information in financial markets exists when borrowers know more about their ability to repay loans than lenders do.

Question

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Asymmetric information means that one party has more or better information than the other party in a transaction. In the case of financial markets, borrowers have more information about their ability to repay loans because they have access to their financial situation and future cash flows. Lenders, on the other hand, have limited information about the borrower's financial situation and must rely on credit scores, financial statements, and other indicators to assess creditworthiness. This information asymmetry can lead to adverse selection and moral hazard problems in lending.

Asymmetric Information in Financial Markets Exists When Borrowers Know More