Insuring Callable Bonds: Selecting the Right Payment Plan

Bond insurance is commonly employed to reduce the cost of issuing debt. Since interest and principal payments of insured issues are guaranteed by a highly rated counterparty, investors require a lower yield to purchase insured bond issues relative to uninsured bond issues for the same credit. The authors of this article compare the cost‐effectiveness of “up‐front” to “pay‐as‐you‐go” premium payment plans for insuring callable bonds.