CIT Group Inc.'s (CIT) stock and short-dated bonds are sharply higher Friday while the cost of default protection on its debt remains at severely distressed levels as investors place bets on the lender's survival.

Efforts are under way to secure funding from bondholders and banks that would help keep the company afloat. Bondholders held calls Thursday to discuss options for the company, including whether to swap some of their claims for an equity stake to cut CIT's debt pile.

Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), and Barclays PLC (BCS) are also in early talks to provide $2 billion to $3 billion in financial help for CIT, according to people familiar with the matter. This would include new money, rather than simply rolling over existing debt.

This money could either be used to keep CIT out of court or become debtor-in-possession financing in a worst-case scenario.

CIT may need as much as $6 billion in funding to avoid filing for bankruptcy protection after talks with the federal government over a rescue package failed earlier this week.

But any deal to save the company will depend on the government allowing CIT to transfer its unencumbered assets to its deposit-taking bank.

"All of these things have to come together for CIT to skirt this problem in the near term," said Chris Munck, high-yield trader at B. Riley & Co.

Discussions on any financing are still fluid, according to one bondholder, who declined to be named.

CIT is an important lender to small and medium-sized businesses. But with only 1% of the U.S. lending market, it isn't viewed as too big to fail in the government's eyes, which gives CIT fewer options. It has reported losses for eight quarters in a row and has been shut out of the debt markets, on which it relies to fund its businesses.

Although a bankruptcy of CIT wouldn't represent a systemic risk to the economy, it would "still [be] disruptive," said Edward Altman, professor at New York University's Stern School of Business. "Frankly, the lending to [small and medium enterprises] is perhaps best suited to others, since CIT botched it," Altman said.

CIT's short-dated bonds were higher Friday, according to MarketAxess, as market participants bet CIT's bondholders will reach a deal. That could open the way for some kind of help from the government.

The floating-rate notes due August 2009, the most actively traded bond, were recently up 10.25 points at 68 cents. That's a touch lower than levels seen earlier in the session when these bonds gained 13.5 points at 70.5 cents.

CIT shares were also higher, up 43 cents, or 105%, to 84 cents recently.

"There's definitely speculation about some kind of bond exchange over the weekend, but it's just speculation," said Pete Brady of Broadpoint Capital.

MarketWatch reported late Thursday that a small group of investors holding several billion dollars of CIT debt formally hired law firm White & Case. The group is willing to put up roughly $2 billion, and White & Case has lined up a bank that has agreed to be the agent for such an investment, according to the report.

Like the common stock, CIT's Series A and Series C preferred stock soared Friday on the potential financing deal, after cratering Thursday on the risk of impending bankruptcy. The Series A was up 52.2% at $1.37 apiece, and the Series B was up 138.4% at $3.79 in recent trading.

Despite the gains, the A preferreds remain far below their $25 liquidation preference, or a technical way of saying par value, and the B shares are just 7.4% of the $50 investors are slated to receive at maturity. The 6.35% payout on the Series A, at today's price, gives it a 115.8% dividend yield, while the 8.75% paid on the Series B gives it an effective 115.4% yield.

Another CIT preferred, a $25 mandatory convertible issued in 2007 and due next year, fell 8% to $8.75, after spiking Thursday. This preferred has the unusual distinction of ranking alongside senior debt in the corporate hierarchy, and investors are playing this as a cheaper way than CIT bonds to participate in any bankruptcy restructuring. Its 6.35% annual payment gives it a yield of 22.2% today.

But in the credit-derivatives market, the cost of protection on CIT debt remains firmly at distressed levels, indicating doubts a rescue plan will be forthcoming. Longer-dated bonds were also lower.

Insuring $10 million of CIT's senior bonds against default for five years was around 44.56 points upfront, according to Phoenix Partners Group. That's against 49 points upfront Thursday. It now costs investors $4.45 million upfront plus a $500,000 annual fee to insure this debt.

-By Kate Haywood, Dow Jones Newswires; 212-416-2218; kate.haywood@dowjones.com

(Andrew Edwards, Joe Bel Bruno, Matthias Rieker and Alistair Barr contributed to this report.)