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- Title
Bond Insurance: What Is Special About Munis?
- Authors
NANDA, VIKRAM; SINGH, RAJDEEP
- Abstract
Close to 50% of municipal bonds are prepackaged with insurance at the time of issue. We offer a tax-based rationale for the emergence of third-party insurance of tax-exempt bonds. We argue that insurance adds value as it allows a third party to become, in a probabilistic sense, an issuer of tax-exempt securities. Insurance however reduces value by eliminating the possibility of a capital tax loss. While the net benefit from insurance increases with bond maturity, the benefit may not increase monotonically with default risk. We also provide empirical evidence supportive of the model's predictions.
- Subjects
BOND insurance; MUNICIPAL bonds; TAX exemption; INCOME tax; TAXATION of securities; DEFAULT (Finance); TAX-exempt securities; SECURITIES underwriting; CAPITAL losses; MUNICIPAL finance
- Publication
Journal of Finance (Wiley-Blackwell), 2004, Vol 59, Issue 5, p2253
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.2004.00698.x