Comments on: The risks of municipal default and bond insurance: Part 2 http://blogs.reuters.com/muniland/2014/03/27/the-risks-of-municipal-default-and-bond-insurance-part-2/ Bridges, budgets, bonds Mon, 24 Nov 2014 00:29:08 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: LongTailFinance http://blogs.reuters.com/muniland/2014/03/27/the-risks-of-municipal-default-and-bond-insurance-part-2/comment-page-1/#comment-2457 Sun, 06 Apr 2014 14:30:48 +0000 http://blogs.reuters.com/muniland/?p=13629#comment-2457 >>Of course the most important and unknown variable in this discussion is the premium that insurers charge a municipality to insure their bonds.

Doesn’t the insurance premium effectively get paid by the bond holders? For example, an insured bond should have a lower coupon and/or higher price than a non-insured bond, thus that differential between it and a non-insured equivalent should be compared to what the out of pocket expense for paying the insurance premium would be. The offset might not be $1 for $1, but hopefully pretty close. In particular, I believe bonds that get wrapped in the secondary market work this way in that the bond holders agree to, say, give up 15bps of coupon or yield (via price adjustment when they surrender to old uninsured bonds for the new ones) in order to pay for the insurance.

But staying with your point, if future expected default rates are low then one would think the cost of insurance to be correspondingly low. Looking forward to any insurance premium data you can locate…

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