of screening is offering different types of funds having different interest rates and asking different amounts of collateral in order to reveal the information about the type of the borrower. If the borrower is a "bad" type, then he/she will choose the type of funds having higher interest rates and requesting lower amount of collateral. However, in real world there are many types of borrowers which we can not categorize with just "bad" and "good" types. For each characteristic of the borrower lender needs to increase the number of instruments to fully reveal the information about the type of the borrower. Hence, in real life it is not possible for lender to fully reveal the type of borrowers. Moral hazard: The other type of asymmetric information is moral hazard which arises from the lack of information about the ex-post behavior of the borrower. After signing the contract, the borrower will tend make riskier project since he does not take the full responsibility of the funds. As the interest rate increases, the possibility of the borrower to engage in riskier projects increases in order to increase the expected return. In general, it is assumed that the riskier projects have higher expected return. Other possibility that results from the lack of information about the behavior of the borrower is that when the borrower declares default, the lender does not know if it is really true or not and what the value of the project/firm is after the default. Hence, it incurs some cost to verify the default. Hence, this also hinders the equilibrium from being efficient as the verification cost decreases the welfare. Limited Commitment Another important characteristic that yields imperfection is that exchange does not happen simultaneously in capital markets. The borrower gets his/her funds, but the lender must rely on the promises of the borrower. One of the conditions for imperfect capital markets is default risk. The borrower may declare bankruptcy, and thus, may not pay the debt back. Hence, the borrower's promises, as well as the structure of the promises, are very important for the transaction to be realized. One of the options in dealing with the limited commitment problem is providing collateral. The contract is formed such that in case of default, the lender has all/some rights to seize the collateral. This is called a secured loan in finance. However, it does not fully solve the problem because