Insurance that guarantees the repayment of a bond if the issuer defaults. This means that if the bond issuer is unable to make payments on the bond, the bond insurance company will step in and make the payments on behalf of the issuer.
It can be used to insure a variety of bonds, including municipal bonds, corporate bonds, and government bonds. It is often used by issuers of bonds that are considered to be high-risk, such as those issued by municipalities with poor credit ratings.
If can provide several benefits to both issuers and investors. For issuers, bond insurance can make it easier to sell bonds by reducing the perceived risk of the bonds. This can lead to lower interest rates on the bonds, which can save the issuer money.
For investors, bond insurance can provide peace of mind by knowing that their investment is protected if the issuer defaults.
There are two main types are:
- Financial guaranty insurance: provided by a financial institution. Financial guaranty insurers are typically well-capitalized and have a long track record of paying claims.
- Surety bond insurance: provided by a surety company. Surety companies are typically smaller than financial guaranty insurers, but they have a good track record of paying claims.
Bond insurance can provide a layer of protection for investors and make it easier for issuers to sell bonds.
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