Municipal Bond Forum
How does bond insurance work?
Q
Regarding your article (“Muni Bond Insurance Rises, Delighting Investors, Issuers”), is there any organization that would step in to force muni bond insurers to pay in the case of a bond failure if the insurer for any reason tries not to insure the bond? If a bond failure occurs, do the insurers pay 100% of the bond value to the holder? If so, what is the average cost of these insurance policies?
A
James A. Klotz responds:
Bonds are fully insured for interest and principal. They can pay as the bond indenture dictates or may opt to accelerate the maturity date and retire the bonds currently in the event of a default.
Issuers, in most cases, pay a one-time fee of approximately 1% to 2% at the time of issuance, depending on the credit.
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