Municipal Bond Insurance

Municipal Bond Insurance Association (MBIA) A group of insurance companies which insure payment of principal and interest on certain bonds. 

Stockholders and lenders. The public firm receives savings from individuals as well as pension and insurance funds to invest. In return, the stockholder receives dividends or interest and stock appreciation. The government firm can return a surplus to the government treasury or perhaps constitute a burden to taxpayers. If the firm did not exist, this capital would be invested elsewhere, perhaps in home mortgages, municipal bonds, commercial paper, or government securities. 

Understandably, investors would be reluctant to invest in a company if its profit expectations were no greater than that of a virtually riskfree investment in federal government bonds or an investment in tax-free, insured municipal bonds. Investors will expect a return commensurate with the risks of the business proposal under consideration. At some time in their history, almost all companies will borrow money from investors, who will review their business plans and their budgets closely. 

Insured municipal bonds have become more and more common. With an insured muni, an insurance company guarantees that the bond s interest or principal payments will continue even if the issuer becomes insolvent and cannot pay. Some investors like the added peace of mind that comes with buying insured municipal bonds. For this added peace of mind, they are also willing to forgo some yield. 

Due to strong economic times and healthy competition among insurers, as many as half of all new municipal bond issues are insured. This is a good thing for individual investors. 

American Municipal Bond Assurance Corporation (AMBAC) A corporation that offers insurance policies on new municipal bond offerings. 

To assess credit risk, individual investors are made aware of the issuer s creditworthiness by agencies such as Standard Poor s, Moody s, Fitch, and other bond-rating firms. Often, to make an issue more attractive, an issuer— usually a company or a municipality—will seek the stellar reputation of an underwriter (Salomon Smith Barney, Merrill Lynch, etc.) and now, as additional strength, will include a layer of insurance in the deal—all to reassure investors that credit risk is minimal. 

As with any type of insurance, you should know the financial health of the insurance company that is insuring the bond you are buying. Insurance companies are evaluated by the rating agencies,- the most well-known and accepted insurance companies enjoy an AAA rating. These private companies insure most of the bonds in the insured municipal market. These industry leaders include ... 

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