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.

ABSTRACT 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.

Casual observers of the New York Stock Exchange are often dumbfounded by the frenetic behavior of its participants. If asked how such chaos generates accurate prices many academicians would reply that the ability to transact frequently is a virtue since it promotes prompt information dissemination and therefore market efficiency. However, in contrast to the NYSE where, during trading hours, trades may be consumated almost continuously, the Paris Stock Exchange trades each security only a handful of times a day. This continental contrast in market structure led us to reexamine the role of speed in markets. We have discovered that if sufficient uncertainty surrounds the dissemination of information, frequent transacting may be deleterious to market efficiency. In fact, in our paradigm we are able to show that our measure of market efficiency may be maximized when there is a unique, non-zero time interval between consecutive trades. The measure of efficiency used throughout the paper is minus the mean squared error. This measure was chosen to focus upon the information content of prices at times when they are posted (i.e., at times of tâtonnements). For this purpose we ignore costs of illiquidity and costs associated with obsolete information that would occur between tâtonnements. In this restricted sphere, maximazation of our efficiency measure is consistent with maximizing Social Pareto Optimality.

Dual fund shares allow individuals to satisfy their divergent preferences for the ordinary income and the capital gains components of return. Institutional restrictions on short selling are shown to permit discounts on dual funds to fluctuate within wide bounds. However, these fluctuations are shown to be consistent with informational efficiency. The average discount is shown to have a contemporaneous association with net redemptions of diversified open-end funds. It is shown that the high turnover of dual fund portfolios is not warranted by their portfolio performance and causes redistributions of wealth between income and capital shareholders.