Municipal Bond Forum
Insurance refund for called bonds?
Q
My understanding is that municipalities generally pay an upfront fee to bond insurers to “”wrap”” their bonds until maturity. If a municipality calls a bond early (for example, to refinance), does it get a pro-rated refund or does the bond insurer get a windfall profit?
A
James A. Klotz responds:
The issuer pays an upfront premium to the insurance company, which agrees to insure the bonds as long as they are outstanding.
There is no refund if the issuer decides to retire its bonds prior to maturity.
Remember, the true value of the insurance to the issuer is the ability to borrow at a lower rate.
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