Estimating the Signaling Benefits of Debt Insurance: The Case of Municipal Bonds
- 1 September 1987
- journal article
- Published by JSTOR in Journal of Financial and Quantitative Analysis
- Vol. 22 (3) , 299
- https://doi.org/10.2307/2330965
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.Keywords
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