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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?

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Answer:

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

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

Explanation: During the fall of 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. What really happened is that default risk increased ,yield increased and the price of AIG decreased . As a​ result, the U.S. government stepped in to support AIG with large capital injections and an ownership stake .After government intervention, default decreased, yield decreased and the price of AIG increased.

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