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The Effect of Default Risk Insurers on Municipal Bond Yields

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  • Steven Cole
  • Pu Liu
  • Stanley D. Smith, 1994

Abstract

Investors in tax-exempt bonds may invest in bonds that are insured against default risk. Research in this paper explores whether it makes a difference to investors which insurer provides the default risk protection. Using a sample of bonds insured by each of the major insurers, evidence is presented that the insurer significantly impacts the yields of insured municipal bonds. Based on their ratings, the rating agencies view the major insurers as equals while investors do not. In addition, the results may be sensitive to insurer-specific information. Previous research is limited to the consideration of a single insurer. Results of the present study show that it may be inappropriate to generalize to all insurers the results obtained from analyzing one insurer. Past and future research should be evaluated in light of these results and the insurer effect considered, where appropriate.

Suggested Citation

  • Steven Cole & Pu Liu & Stanley D. Smith, 1994, 1994. "The Effect of Default Risk Insurers on Municipal Bond Yields," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 17(1), pages 1-20.
  • Handle: RePEc:wri:journl:v:17:y:1994:i:1:p:1-20
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