Municipal Bond Insurance
Insurance policies that protect investors if a municipal bond should default–the bonds will be purchased from investors at par. The insurance may either be purchased by the issuer or the investor. Two major insurers of municipal bonds are the Ambac Indemnity Corporation and the Municipal Bond Insurance Association (MBIA). Insured municipal bonds usually have the highest ratings. Subsequently, the bond’s marketability increases, which lowers the cost to their issuers. However, the yield on an insured bond is usually lower than similarly rated uninsured bonds–the cost of the insurance is passed on to the investor. To obtain the extra degree of safety, many investors do not care if the yields are slightly lower.
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