The Private Premium in Public Bonds

40 Pages Posted: 11 Mar 2012

See all articles by Anna Kovner

Anna Kovner

Federal Reserve Bank of New York

Chenyang (Jason) Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2012

Abstract

This paper is the first to document the presence of a private premium in public bonds. We find that spreads are 31 basis points higher for public bonds of private companies than for bonds of public companies, even after controlling for observable differences, including rating, financial performance, industry, bond characteristics and issuance timing. The estimated private premium increases to 40 to 50 basis points when a propensity matching methodology is used or when we control for fixed issuer effects. Despite the premium pricing, bonds of private companies are no more likely to default or be downgraded than are public bonds. They do not have worse secondary market performance or higher CDS spreads nor are they necessarily less liquid. Bond investors appear to discount the value of privately held equity. The effect does not come only from the lack of a public market signal of asset quality, because very small public companies also pay high spreads.

Keywords: Bond prices, interest rates

Suggested Citation

Kovner, Anna and Wei, Chenyang, The Private Premium in Public Bonds (February 1, 2012). FRB of Philadelphia Working Paper No. 12-7, Available at SSRN: https://ssrn.com/abstract=2014177 or http://dx.doi.org/10.2139/ssrn.2014177

Anna Kovner (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Chenyang Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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