First, consider some basic background information concerning the differences between not-for-profit organizations and investor-owned firms. What is credit enhancement, and what effect does it have on debt costs?

Sandra McCloud, a finance major in her last term of college, is currently scheduling her placement interviews through the university's career resource center. Her list of companies is typical of most finance majors: several commercial banks, a few industrial firms, and one brokerage house. However, she noticed that a representative of a not-for-profit hospital is scheduling interviews next week, and the position--that of financial analyst--appears to be exactly what Sandra has in mind. Sandra wants to sign up for an interview, but she is concerned that she knows nothing about not-for-profit organizations and how they differ from the investor-owned firms that she has learned about in her finance classes. In spite of her worries, Sandra scheduled an appointment with the hospital representative, and she now wants to learn more about not-for-profit businesses before the interview.
To begin the learning process, Sandra drew up the following set of questions. See if you can help her answer them.

Credit enhancement is, simply, bond insurance that guarantees the repayment of a municipal bond's principal and interest. When issuers purchase credit enhancement from insurers, the bond is rated on the basis of the insurer's financial strength rather than the issuer's. Since credit enhancement raises the bond rating, interest costs are reduced. However, the issuer must bear the added cost of the bond insurance.