On the Valuation of Federal Loan Guarantees to Corporations



  • Columbia Business School. This paper was initiated while the author was an MTS at Bell Labs. I want to thank Mr. M. Barry Goldman, Professor Robert Litzenberger, Professor Krishna Ramaswamy, Mr. Jacques Rolfo, and Mr. Donald Tucker for helpful comments. I also want to thank Mrs. Mary Ann Gatto and Ms. Judy Seery for programming assistance. I alone am responsible for the contents of the paper.


Since 1956, Federal Loan Guarantee Programs have expanded to the point where recipients of guarantees represent most segments of the economy. Considerable debate centers on the determination of the magnitude of the liability of the Federal Government that is represented by these programs. This paper illustrates how option pricing techniques may be used to obtain estimates of the purely pecuniary costs of loan guarantees, interest saving to the firm on senior and junior debt, and implicit present value profitability indices of projects.