It also sees the government as ready to bailout senior bondholders in Credit Suisse and UBS but heavily downgrades ratings on subordinate debt on the assumption that, should the banks in Zurich get in trouble again, Geneva might take the radical Marxist action of letting investors in highly speculative uninsured bonds
actually experience some capitalism.
Analyzing bond data in the early 1980's, Carpenter (1991) found that insured bonds had a yield 87 percent lower than uninsured bonds. From 1990 through 1993, McCue (1997) assessed a large sample of hospital bond issues and found that enhanced bonds, including bonds with insurance and letters of credit, incurred yields that were 51 basis points lower than issues without these enhancements.
Given that hospital and healthcare tax-exempt organizations generally do not have any underlying AAA-rated bonds (i.e., without insurance), this study compared each insured and uninsured rated issue to BBB-rated uninsured bonds (Moody's, 2005).
[H.sub.2]: Hospital and healthcare systems with disclosed underlying ratings for insured bond issues are expected to have lower yields than uninsured bonds.
To measure the default risk of uninsured bonds, the study included the Bond rating assigned by the rating agency.
Given the omitted reference group of BBB-rated uninsured bonds, the yields of AA-rated uninsured bonds were 73 basis points lower, while A-rated uninsured bonds were 71 basis points lower.
All the rated and non-rated issues, except non-rated uninsured bonds, were statistically significant.
Although insured AAA tax-exempt hospital and healthcare system bonds have no direct comparison to uninsured AAA-rated bonds, the study was able to compare the yields of AA-rated insured bonds and AA-rated uninsured bonds to the reference group of BBB uninsured bonds.
The most significant benefit of bond insurance is interest savings--the "spread" between an insured and an uninsured bond. Interest savings can be determined by subtracting the average yield for a bond for a given credit rating and maturity from that of an insured bond of the same maturity.
In 2000, the spread between the average AAA-rated insured bond and the average A-rated uninsured bond ranged from 8 to 13 basis points, depending on maturity.