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Assume that U.S. Treasury decides to extend a loan guarantee (for political reasons) to a country with a B rating. With such a guarantee this country will be able to issue a five-year $2 billion face value zero-coupon bond at a yield of 7.5 percent (annual compounding). Assume that the yield on a similar maturity U.S. Treasury bond and a B rating sovereign debt is 7.5 and 8.5 percent, respectively. Does this loan guarantee have any implicit cost on the U.S. taxpayers and if so how much?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91772009

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