Bond Insurance

Used for: Local and state government bonds (e.g. school districts, cities).

Purpose: Enhances the credit rating of the municipal bond to attract more investors.

Benefit: Lower borrowing costs for public entities.

Example: A city issues a bond to fund infrastructure, and bond insurance ensures timely payments even if the city faces financial difficulties.

Used for: Corporate bonds issued by companies.

Less common than municipal bond insurance due to the higher default risk in the corporate sector.

Benefit: Can help lower-rated companies issue debt more affordably.

Risk: Insurers are more selective due to the potential for corporate defaults.

Used for: Bonds backed by pools of assets such as mortgages, car loans, or credit card receivables.

Common types include:

• Mortgage-backed securities (MBS)
• Auto loan-backed securities
• Credit card-backed securities

Purpose: Enhances the credit rating of the ABS, especially useful for tranches with lower inherent credit quality.

Role in 2008 crisis: Misuse of insurance (mainly credit default swaps rather than traditional bond insurance) played a major role in the financial crisis.

Used in: Construction and performance contracts rather than debt issuance.

Three parties involved:

• Principal (contractor)
• Obligee (project owner)
• Surety (insurance company)

Purpose: Guarantees the contractor will meet obligations.

Note: This is technically not "bond insurance" in the debt market sense but is often referred to as such in the insurance industry.