Assume a risky firm has both bondholders and stockholders.If the firm obtains a government loan guarantee on its existing debt,who will gain from this guarantee?

Question

Quizplus · Accepted Answer

Existing bondholders will gain from the government loan guarantee because it reduces their risk of default and increases the likelihood of them receiving their interest and principal payments. Stockholders may benefit indirectly if the guarantee improves the firm's financial stability and profitability, but they do not benefit directly like bondholders do. Future stockholders are not relevant in this scenario because the loan guarantee only affects existing debt.

Assume a Risky Firm Has Both Bondholders and Stockholders