Regional Interest Rate Premia in the American Railroad Bond Market from 1876 to 1890

A pattern of higher interest rates in the South and West of the postbellum United States has been well established in the literature. Kenneth Snowden has examined their effects on home and farm mortgages (1987a). Lance Davis has tracked similar patterns in bank-financed projects (1965). This work complements that of Snowden and Davis by establishing that similar interest rate premia existed in the railroad bond market—the most institutionally mature capital market of the era. Hence a broad range of investment opportunities of the era were subject to capital market imperfections. In this paper I examine the offering yields of long-term, railroad bonds issued from 1876 to 1890. I use a risk-neutral model of a bond's value that incorporates both the likelihood and severity of default to solve for the interest rate premia paid by the South and West—0.97 and 1.02%, respectively.