An Examination of the Yield Spread Between Insured and Uninsured Debt

Abstract

Currently, municipal bonds insured by major insurance firms receive the highest credit rating from rating agencies. The interest rates on regular triple-A municipal bonds, however, have been persistently below those of insured bond issues. The yield spread between insured and uninsured triple-A bonds in the tax-exempt market is examined here, and it is shown that the yield spread may be attributable to split ratings and default-related risks.

The Relative Influence of Fund-Based and Government-Wide Financial Information on Municipal Bond Borrowing Costs

“…Theoretically, the market should price all insured bonds as triple-A rated. However, researchers (Hsueh and Chandy 1989;Peng and Brucato 2004) indicate that the price of insured bonds is affected by the fact that the creditor could still incur losses should the insurer default. Creditors must therefore consider the joint probability that the insurer and the issuer will default (Insured).…”

Trading Activity and Price Volatility in the Municipal Bond Market

“…12 12 For recent studies of the effects of insurance on muni bond yields, see Quigley and Rubinfeld (1991) and Hsueh and Chandy (1989). …”

Credit Risk Derivatives

“…financing with the use of bond insurance (see Hsueh and Chandy [1989] and Jaffe [1992]). It is unclear whether this is true for corporate issuers.…”