Credit Guaranties: Fair Value and Fair Market Value

Thomas Jefferson was driven to virtual bankruptcy by the financial failure of a close friend, whose debt Jefferson had guaranteed.¹ Two hundred years later credit guaranties are commonplace in the financial structure of small, closely held businesses. Today, as in Jefferson's time, questions regarding the financial implications of credit guaranties remain. Do credit guaranties carry a cost? Do they have value? Should they be considered in the valuation process? This paper addresses those and other financial issues related to credit guaranties.