Determinants of Private Sector Insurance Premiums on Municipal Debt Issues

 

Abstract

 

This paper examines the pricing of municipal bond insurance—insurance generally paid for by the issuer that guarantees payment of principal and interest on newly issued bonds.  In particular, it focuses on the factors that cause the premiums to vary from one municipality to another and from one bond issue to another. This study utilizes a unique municipal bond database that includes the insurance premium paid by issuers of municipal debt obligations in Texas. Our study focuses on the determinants of bond insurance premiums for one type of municipal bond, city general obligation bonds.  The paper finds that municipal bond insurance premiums conform quite closely to what a theoretical model would predict.  Those factors that lead to an implied higher risk for the insured and their bond issues are associated with higher insurance premiums charged by the insurers.

 

3/3/2011, edb.