Why You Need Bond Insurance

​Bond insurance, like any other type of coverage, is now becoming increasingly important. Also referred to as financial guarantee insurance, guards bondholders against the issuer defaulting on their obligations by guaranteeing the principal repayment and other accompanying interest charges. 

When calculating the fee that will be compensated to the insurer as compensation, the insurance provider considers the issuer's risk.

​Bond Insurance: An Understanding
Credit enhancement is a strategy a borrower uses to increase the creditworthiness of their debt to get better terms on their debt. And bond insurance is one way to improve credit.  Aside from that, this kind of insurance is typically purchased by bond issuers to lower the interest that must be paid and increase the bonds' appeal to possible investors. 

The lower an issuer's credit score and, consequently, the higher yield investors anticipate from investing in the debt security, the riskier an issuer is perceived to be. These issuers have higher borrowing fees than companies that are thought to be more reliable and risk-free. Companies may go through a credit enhancement process to improve their rating and attract more investors for a bond issue.

Benefits for Investors
If the issuer does not pay principal or interest when due, the insurer will provide an additional payment source for investors buying or holding insured securities. This lowers the likelihood that payment will be missed and increases the likelihood that both the issuer and the insurer will default.

This insurance may also increase the market liquidity for the insured securities. Uninsured bonds issued by one particular issuer may only occasionally trade, whereas bonds issued in the insurer's name are much more inclined to be constantly traded.

Additional Factors
Bond insurers typically only cover investments with grade ratings ranging from triple-B (BBB) to triple-A (AAA). After purchasing bond insurance, the bond's credit rating will be adjusted higher to reflect the bond insurer's creditworthiness rather than the bond issuer's bond rating.

Municipal bonds provided by states, local governments, and other agencies in the United States and some other countries make up the majority of insured securities today. Bond insurance has also been used to finance infrastructure projects, including public-private partnerships, bonds from non-American regulated utilities, and foreign and domestic asset-backed securities (ABS).

Conclusion
Aside from protecting bondholders from default by ensuring repayment of principal and interest payments and improving credit on issuer's bonds which makes them more attractive to investors, bond insurance also gives people peace of mind knowing that they are protected from financial liabilities in the event of mishaps. 

At Appletree Insurance, we strive to provide our clients with affordable and comprehensive policies. We will always go all out to satisfy your demands. To learn more about how we can assist you, don't hesitate to contact us 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!