Pricing Municipal Debt

Edward Henry Robbins

Journal of Financial and Quantitative Analysis, 1984, vol. 19, issue 4, 467-483

Abstract: Pricing municipal debt is a process substantially different from the valuation of corporate liabilities. Municipalities are not seized upon default. Therefore, they might own additional assets that could he made available to retire debt even when the value of pledged revenues is insufficient to do so. However, if the value of the municipality's additional assets is only observable privately, moral hazard can deter payments from these alternative revenue sources. A second consequence of lack of seizure is that the municipality survives and might return to the capital markets to raise additional funds in the future. This opens an opportunity to induce “extraordinary” payments from the value of the additional assets through multiperiod pricing controls (e.g., by following defaults with poor pricing for subsequent securities issues).

Date: 1984
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