Loan guarantee is a promise that a guarantor firm, in lieu of the debtor
firm, would pay for the portion of debt which would not be honored by a
debtor firm. Then, what happens to the loan guarantee if the guarantor firm
herself rather than the guaranteed firm becomes financially distressed? This
paper extends put option approaches to valuing loan guarantee by Jones and
Mason (1980), Merton (1977), and Sosin (1980). Each case of full guarantee,
proportional partial guarantee, and capped partial guarantee is covered. The
suggested extension of pricing loan guarantee would prove useful in
coordinating interests of many different classes of claim holders if guarantor
firms filed for bankruptcy procedures. Case of Kia Motors which filed for
bankruptcy procedure in Oct. 1997 is briefly discussed.