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Municipal Bond Insurance: Protecting Your Investment from Default

Sunday, Aug 09, 2015

When a bond purchaser is surveying municipal bonds available for investment through a specialized muni bond broker dealer like the GMS Group, they may see the term “municipal bond insurance” applied to certain bonds. What exactly does this mean and what should an investor expect when they see this term?

Municipal bond insurance is an insurance policy attached to certain municipal bonds, underwritten by a private insurance company. Prior to a municipal bond being insured, it undergoes a thorough evaluation by the insurance company that is issuing the insurance policy. During this time, the bond undergoes a risk assessment to ensure the most
appropriate insurance policy is crafted. Credit rating agencies such as Moody’s, Standard & Poor’s, and Fitch, closely monitor the insurance companies doing this work to ensure expert formulation of the policy.

Municipal Bond Insurance: The Security

Through municipal bond insurance, investors are ensured that no matter what happens to the finances of the issuer, the bond’s interest and principal payments will continue to be made by the insurance provider when due. Municipal bond insurance can provide a form of financial security to investors in a couple of ways:

Security from default: Municipal bond insurance helps to diminish the risk of financial loss through potential default—even if the bond issuer should default, the insurance provider will continue to make the coupon payments to the investor.

Security from project failure: When a municipal bond is utilized to finance a project, the issuer often relies upon the financial success of the project. If that project fails to bring in the expected revenue, issuers run the risk of not being able to pay back the bond, which may pose financial threat to the investor. If the bond is insured, the risk of financial loss is diminished through the reassurance of the insurance provider.

Note: The insurance does not provide a guaranty against loss of principal by the bondholder should he or she sell the bond prior to maturity.

Because of these securities, many investors consider municipal bond insurance to be a safer financial route when it comes to investing in municipal bonds where applicable. However, every financial situation is unique and the option to choose an insured bond over a non-insured bond is a personal financial decision that an investor should discuss with their broker.

Insured Municipal Bond Ratings

Because of the lowered default risk, a bond that is insured will likely have a higher rating than comparable underlying securities that are not insured. In fact, insured bonds often receive the highest investment grade ratings by credit rating agencies.

Investing in Municipal Bond Insurance

At the GMS Group, our focused specialty in municipal bonds means that we are highly qualified to advise our clients about which bonds will best fit their investment objectives. While many of the larger investment firms do only a small portion of their business in municipal bonds, at the GMS Group it is our core product.

To learn more about municipal bonds, contact the GMS Group and put a fixed income specialist to work for you!