The Value of Municipal Bond Insurance to the Individual Investor

As a result of the Tax Reform Act of 1986 and recent market conditions individuals have become the largest investors group in the Municipal Bond (MB) market. Whereas the value of MB insurance to the issuing municipality is well documented in current literature, very little attention was given to its value to the individual investor. Although the value of insured vs. non-insured MBs is determined in free markets this study attempts to examine the perceived cost-benefit of insured MBs to the individual investor. The analysis concludes that it is the investor rather than the MB issuer who ultimately pays for the MB insurance cost, and this cost is substantial. Disclosure of MB insurance cost information should help individual investors in making rational decisions when investing in insured rather than non-insured MBs as long as the perceived benefits of risk aversion and increased marketability exceed the insurance cost to the investor.