Municipal Bond Insurance

What Is Municipal Bond Insurance?

First lets get Municipal Bond Defined. Then We Will Get To The Insurance Of It.

  • municipal bond:
  • A bond issued by a state or local governmental unit.

    Municipal bonds are debt obligations issued by states, cities, counties and other governmental entities, which use the money to build schools, highways, hospitals, sewer systems, and many other projects for the public good.

    When you purchase a municipal bond, you are lending money to a state or local government entity, which in turn promises to pay you a specified amount of interest (usually paid semiannually) and return the principal to you on a specific maturity date.

    Not all municipal bonds offer income exempt from both federal and state taxes. There is an entirely separate market of municipal issues that are taxable at the federal level, but still offer a state—and often local—tax exemption on interest paid to residents of the state of issuance.

    Most of this municipal bond information refers to munis which are free of federal taxes. See Taxable Municipal Bonds for more about taxable municipal issues.

    Why Invest in Bonds?
    Many personal financial advisors recommend that investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending upon individual circumstances and objectives. Whatever your investment goals, your investment advisor can help explain the investment options available, taking into account your income needs and tolerance for risk.

    Typically, bonds pay interest semiannually, which means they can provide a predictable income stream. Many people invest in bonds for that expected interest income and also to preserve their capital investment. Understanding the role bonds play in a diversified investment portfolio is especially important for retirement planning. During the past decade, the traditional defined-benefit retirement plans (pensions) have increasingly been replaced by defined contribution programs such as 401(k) plans or IRAs. Because these plans offer greater individual freedom in selecting from a range of investment options, investors must be increasingly self-reliant in securing their retirement.

    Whatever the purpose—saving for your children’s college education or a new home, increasing retirement income or any of a number of other financial goals—investing in bonds may help you achieve your objectives.

    Owners of municipal bonds can purchase insurance to protect them. Although municipal bonds are considered safe, some investors feel better knowing that their investments are protected against loss. Especially in this kind of economy. As a wise investor, you should know about municipal bond insurance and its pros and cons. By knowing the advantages of insuring, you should be able to choose whether you want your own insurance or not.

    Why Should I Get Municipal Bond Insurance?

    A municipal bond is an obligation of debt issued by states and city and local governments to raise money for the public funding of projects and services like schools and housing. Municipal Bond Insurance is an insurance policy on the bond and is underwritten by a private insurance company.

    Like other bonds, municipal bonds have certain risks associated with them. A bond's main risk is that it could default. If a bond defaults, it means the government that issued the bond does not have the funds to make timely payments of interest and principal.

    Insurance provides investors with the security that no matter what happens to the finances of the government that issues the bond, the bond's interest and principal payments will be made.

    Municipal bonds also count on the projects they finance to bring in expected revenues. The governments that issue municipal bonds often rely on these revenues to pay back the bonds they issue. Municipal bonds therefore also run the risk that these projects will fail to produce the revenue needed to pay off the bonds.

    Bonds with low default risk are given high credit ratings, which influence the market prices of the bonds. A bond that is insured will have a higher credit rating than a non-insured bond. Insured bonds receive the highest credit rating possible: AAA. The higher credit rating enables the bond issuer to pay a lower interest rate on the bonds when they are sold. There are four major agencies that provide bond credit ratings. These agencies are the following:

  • Moody's Investors Service

  • Standard & Poor's Corporation

  • Fitch IBCA, Inc.

  • Duff & Phelps Credit Rating Co.

  • Insuring a municipal bond also increases the bond's marketability. The insurance helps smaller issuers who are unknown or do not issue bonds frequently to be taken seriously by an investor.

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