2.3.2.1 Bond Insurance

2.3.2.1 Bond Insurance

With bond insurance, an insurance company approved to insure municipal bonds issues a policy insuring timely payment of principal and interest on the debt. The bond insurer pays scheduled principal and interest on the debt in the event payments are not made by the issuer (or are recovered from holders by a bankruptcy trustee). Following any such payment, the bond insurer steps into the shoes of the debt holder with respect to rights to receive payments of principal and interest on the obligation by the issuer. Bond insurance is not a liquidity facility. It does not secure payment of the purchase price of variable-rate debt upon tender by holders.

To obtain a bond insurance policy, an issuer must pay a premium generally based upon total debt service on the issue and determined in large measure by the underlying credit rating, the bond insurer’s own analysis of the issuer’s credit, and the security for the debt. Bond insurance premiums are paid when the insured obligations are issued and are generally not refundable, even if the debt is refunded or otherwise prepaid. Because bond insurance can be obtained to cover the full term to maturity of the debt, bond insurance is the usual form of credit enhancement for fixed rate issues.