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?

Short answer

As a result of the government's increasing support in the financial breakdown of $2008$the yield and risk premium will fall.

Step-by-step solution

Introduction

Debt is a financial instrument that a company releases to raise funds and then pays interest to the investors. The loan interest rate can be fixed or variable.

To determine

The impact of the $2008$market correction on the yield and risk premium on A's corporate debt.

Explanation

A Insurance Company's growing level of default prompted the government to provide the company with capital injections. The government's increasing backing resulted in higher demand for the rise in corporate debt. As a result, the yield decreased. Furthermore, the risk premium tends to decline as a result of the government's assurance of stability.

As a result of the government's expanded support during the financial crisis of $2008$, the yield and risk premium will fall.