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Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds

Published online by Cambridge University Press:  06 April 2009

David S. Kidwell ,
Eric H. Sorensen  and
John M. Wachowicz Jr
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Abstract

This paper examines the demand for municipal bond insurance in the context of a competitive signaling equilibrium model. The study compares the pricing of new bond issues that are insured to similar issues that are not insured. The results indicate that issuers who purchase bond insurance, on average, are able to reduce their new issue borrowing cost more than enough to offset the cost of the insurance premium. Furthermore, the net benefit to the issuer increases as the underlying credit quality of the bond declines.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 22 , Issue 3 , September 1987 , pp. 299 - 313
Copyright
Copyright © School of Business Administration, University of Washington 1987

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