Question

In the fall of 2008, AIG, the largest insurance company in the world at the time, was at risk of defaulting due to the severity of the global financial crisis. As a result, the U.S. government stepped in to support AIG with large capital injections and an ownership stake. How would this affect, if at all, the yield and risk premium on AIG corporate debt before and after U.S. Government support

Answer 1

• Initially default risk increases, yield increases, price of AIG decreases

• After government intervention, default decreases, yield decreases, price of AIG increases