Bond insurance: What is special about munis?

• 成果类型: Article
• 署名作者: Nanda, V; Singh, R
• 署名单位: University of Michigan System; University of Michigan; University of Minnesota System; University of Minnesota Twin Cities
• 刊物名称: JOURNAL OF FINANCE
• ISSN/ISSBN: 0022-1082
• DOI: 10.1111/j.1540-6261.2004.00698.x
• 发表日期: 2004
• 页码: 2253-2279
• 关键词: Municipal bonds; MODEL; debt

摘要

Close to 50% of municipal bonds are prepackaged with insurance at the time of issue. We offer a tax-based rationale for the emergence of third-party insurance of tax-exempt bonds. We argue that insurance adds value as it allows a third party to become, in a probabilistic sense, an issuer of tax-exempt securities. Insurance however reduces value by eliminating the possibility of a capital tax loss. While the net benefit from insurance increases with bond maturity, the benefit may not increase monotonically with default risk. We also provide empirical evidence supportive of the model's predictions.