Saturday, April 17, 2010

Do Investors Look Beyond Insured Triple-A Rating?

This article demonstrates that for insured municipal bonds, revelation of underlying ratings can be an effective mechanism for further alleviating the information asymmetry problems found in the municipal bond market. Due to the prevalence of municipal bond insurance, investors are increasingly relying on the underlying ratings of insured bonds in gauging the relative riskiness of these bonds. For a sample of 697 municipal bonds issued in 1998, the results indicate that Standard & Poor's underlying ratings are able to reduce borrowing cost by four basis points, due to the additional information provided through these ratings.
Source: Peng, Jun, Do Investors Look Beyond Insured Triple-A Rating? An Analysis of Standard & Poor's Underlying Ratings. Public Budgeting and Finance, Vol. 22, pp. 115-131, 2002. (link)