financial guarantee protecting a municipal bond issue against default risk. Coverage is purchased from a number of private insurance companies, such as AMBAC Indemnity Corporation, and the Municipal Bond Insurance Association. Bonds insured by these firms, which offer to purchase the bonds at par in event default occurs, enjoy an AAArating, enabling government agencies to issue bonds at a lower cost. Insured bonds ordinarily have a lower yield than uninsured bonds as the cost of insurance typically is passed on to the holder. When a bond defaults, it is paid off immediately so that even if principal is recovered, interest from the date of default to maturity is not earned. financial guarantee
policies underwritten by private insurers guaranteeing municipal bonds in the event of default. The insurance can be purchased either by the issuing government entity or the investor; it provides that bonds will be purchased from investors at par should default occur. Such insurance is available from a number of large insurance companies, but a major portion is written by the following "monoline" companies, so-called because their primary business is insuring municipal bonds: AMBAC Financial Group, Inc. (AMBAC); Capital Guaranty Insurance Company (CGIC); Connie Lee Insurance Company; Financial Guaranty Insurance Company (FGIC); Financial Security Assurance, Inc. (FSA); and Municipal Bond Investors Assurance Corporation (MBIA). Insured municipal bonds generally enjoy the highest rating resulting in greater marketability and lower cost to their issuers. From the investor's standpoint, however, their yield is typically lower than similarly rated uninsured bonds because the cost of the insurance is passed on by the issuer to the investor. Some unit investment trusts and mutual funds feature insured municipal bonds for investors willing to trade marginally lower yield for the extra degree of safety.
coverage that guarantees bondholders against default by a municipality. This form of financial guarantee was introduced in the early 1970s and became a runaway success. Municipalities embraced it because their offerings took on the credit rating of the company that wrote the insurance, rather than their own ratings. It meant that most municipal bond offerings were elevated to Triple-A, and municipalities could raise money at a lower rate of interest. For investors, it made municipal bonds less risky.
