In this paper, we study the role of government financial guarantees as catalyst for project finance (PF). On the one hand, the government's incentive compatibility and participation constraint determine the optimal portion of the loan to be backed. On the other, the borrowing interest rate...

Merton and Bodie (1992) show that third-party financial guarantees are overwhelming pervasive. Using the risk-neutral valuation framework of Brennan (1979) and Stapleton and Subrahmanyam (1984), without imposing any no loss-no gain condition on stockholders and debtholders, we examine the impact...

Loans guaranteed by private parties other than government agencies experienced an explosive growth in the early 1980s. Although private financial guarantees are widely used, models for valuing them are not well developed. Using option-pricing theory, in a discrete-time framework we obtain...