What Is Bond Insurance?


Bond insurance is a category of insurance policy bought by a bond issuer. It guarantees the repayment of the principal amount in addition to all associated interest amounts to the bondholders in the event of default. In order to lower the amount of interest that it needs to pay and make the bonds more attractive to potential investors, bond issuers will buy this type of insurance to enhance their credit ratings. Bond insurance can also be known as financial guaranty insurance.

Key Points

Bond insurance is typically seen among municipal bonds and asset-backed securities, and they guarantee repayment of the principal and sometimes the interest, thereby protecting borrowers from default by the issuer.

The riskier an issuer is considered to be, the lower its credit rating is applied and, so, the higher the yield that investors expect from investing in it. Such issuers are faced with a higher cost of borrowing than companies that are estimated to be stable and less risky. In order to secure a more favorable rating and to attract more investors to a bond issue, companies may undergo a credit enhancement. Issuers of bonds who purchase this type of insurance can receive a better credit rating on those bonds; as a result, thereby making them more attractive to investors.

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