Municipal Bond Insurance: Trends and Prospects

Abstract

Privately sold bond insurance is the most common form of credit enhancement for municipal bonds. Research generally finds that bond insurance reduces interest costs for lower rated, long-term debt issues. Researchers have concluded that these results are consistent with presumed investor risk aversion, as well as more "rational" risk management behaviors, and with theories concerning the efficiency-enhancing properties of financial intermediation in imperfect markets. We propose a research agenda based both on traditional theories and on additional hypotheses that seek to account for the observed use of bond insurance where net savings would not normally be predicted.