Bond Insurance Explained: Types And Coverages

​A bond issuer buys bond insurance to ensure that bondholders will get their money back in full in the event of default of the issuer, including the principal and any related interest payments. Bond insurance aims to raise the issuer's credit rating to lower the required interest payments and increase the bonds' marketability to potential buyers. 

Municipal bond insurance and bond for asset-backed securities are two types of bond insurance commonly seen in the market. 

1. Municipal Bond
   Municipal bonds are generally thought of as low-risk investments because these are issued by state and local governments, which are normally seen as stable and dependable borrowers. Being low-risk means many investors are prepared to purchase municipal bonds without the additional security provided by bond insurance.  
   
   In addition, municipal bond insurance used to be more prevalent because it improved the issuer's creditworthiness and increased the bonds' appeal to investors. However, the use of bond insurance for municipal bonds has reduced in recent years due to the growth of financial markets and the increasing accessibility of information regarding the creditworthiness of issuers.
   
   
2. Asset-Backed Securities Bond
   Securities that are backed by a collection of assets, such as mortgages, auto loans, or credit card receivables, are frequently covered by asset-backed bond insurance. Even in the case of defaults on the underlying assets, the insurance ensures the timely payment of interest and principal on the bond. 
   
   Asset-backed securities bond insurance can help to improve the issuer's creditworthiness and increase the bonds' attractiveness to investors. Notably, as the market for asset-backed securities has grown more open and investors have become more knowledgeable of the risks involved, the use of bond insurance for these securities has also declined recently.

Bond Insurance Provides Additional Security
Bond insurance gives bondholders an additional layer of security in the event of an issuer default, enhancing the issuer's creditworthiness and making the bonds more appealing to investors. Increased marketability, cheaper interest rates, and easier investor sales are all benefits of adding security. 

Municipal and asset-backed securities bond coverage frequently includes details on the issuer's financial standing, the bond's design, and any applicable legal or regulatory matters.  Municipal and asset-backed security bonds are given credit ratings by rating agencies, which aid investors in determining the creditworthiness of the issuer and helping them make wise investment choices.

At Appletree Insurance, we do our best in making sure that our clients are well-protected with affordable and comprehensive policies. We make sure to go the extra mile to help you with your needs. To learn more about how we can help you, please contact our agency at (603) 881-9900 or CLICK HERE ​to request a free quote. Topics and coverage discussed in this article are not guaranteed, consult with your agents to determine what your policy does and does not cover. We are more than happy to help!