Determinants of Yields in Private Colleges’ Revenue Bonds

Abstract

This study examines the yield spreads of 3,362 revenue bonds issued by 213 private colleges and universities in the United States. The authors find that the bond ratings of Moody’s and S&P have the most important effect on the spreads and that higher ratings result in lower debt costs. Furthermore, the college financial grades of Forbes have a similar effect on the ratings of the private colleges’ revenue bonds. They also find that private colleges can save 34 to 40 basis points in financing costs by issuing premium bonds because of greater demand by investors who seek a larger tax exemption from higher coupon payments. Additionally, private colleges who purchase insurance can finance bonds at lower interest rates. For example, bond insurance can result in a decrease of approximately 52 basis points in the yield spreads. Additionally, colleges with better quality credit and colleges located in states with high income tax rates have a greater likelihood of issuing premium bonds.