Some Pitfalls in Loan Subsidy Valuation

Author: Schnabel, Jacques

Source: The Engineering Economist, Volume 54, Number 1, January 2009 , pp. 75-79(5)

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Abstract:

Notwithstanding his exhaustive treatment of alternative loan subsidy valuation methods, Jennergren entertains only one type of loan structure in his paper, to wit, bond-type arrangements that entail only interest payments during the life of the debt and the repayment of the entire principal at maturity. The effects of this loan structure specificity are illustrated in the context of Jennergren's dual interpretations of his first loan subsidy valuation method. It is shown that, absent a restriction that the loan must satisfy, the two interpretations result in different valuations. This cautionary note argues that future research must develop loan subsidy valuation methods that are loan structure robust by addressing the more fundamental issue that remains unresolved, namely, how to calculate the amount of the unsubsidized loan that is replaced by the subsidized loan.

Document Type: Research article

DOI: http://dx.doi.org/10.1080/00137910802711891

Affiliations: 1: School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada

Publication date: 2009-01-01