Assume a risky firm has both bondholders and stockholders. If the firm obtains a government loan guarantee on its existing debt, who will gain from this guarantee?

Multiple Choice

• Existing bondholders only

  Correct

• Both existing bondholders and stockholders in proportion to the firm's debt-equity ratio

  Incorrect

• Existing bondholders and stockholders on an equal basis

• Future stockholders only

• Existing stockholders only