The Impact of Demographic and Socioeconomic Factors on Municipal Bond Coupon Rates

Abstract: This thesis aims to understand and explain if and how demographic and socioeconomic factors affect the cost of debt for local governments, namely U.S. counties when issuing municipal bonds. By first discussing potential factors that may prove significant to financial performance, correlation analysis and model testing are made. Inspired by previous research, this thesis employs a fixed effects OLS model. The results provide significance and high explanatory value that investors actually do evaluate these factors when assessing the risk premia of municipal bonds. The final model indicates that unemployment rate, share of youth, property tax, retirement benefits, level of public spending and public affiliation have significant impact on the coupon rates of municipal bonds. As only one of these factors is demographic in nature, the thesis concludes that investors pay greater attention to socioeconomic factors, beside financial factors already explained by previous research.