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Which Bonds Are More Expensive? The Cost Differentials by Debt Issue Purpose and the Method of Sale: An Empirical Analysis
Author(s) -
GUZMAN TATYANA,
MOLDOGAZIEV TEMIRLAN
Publication year - 2012
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/j.1540-5850.2012.01013.x
Subject(s) - underwriting , bond , debt , quality (philosophy) , economics , business , bond market , function (biology) , regression analysis , actuarial science , econometrics , monetary economics , finance , computer science , philosophy , epistemology , evolutionary biology , biology , machine learning
In this paper, we survey the cost differentials by debt issue purpose and the method of underwriting. We find that cost differentials are a function of the purpose for which the debt was issued, with bond purposes traditionally considered riskier facing higher borrowing costs. However, this effect is not uniform and varies by credit quality portfolios. Moreover, the method of bond sale is an important factor for true interest costs. Overall, the competitive method of sale consistently performs better than the negotiated method of sale in all regression models, even after correcting for self‐selection.