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Definition of Bond Insurance

Bond Insurance is an optional insurance policy which is aimed primarily at guaranteeing that a bondholder will receive interest and capital repayments in the event of default. The mechanism of Bond Insurance involves a third party - an insurance company which provides the issuer with an insurance policy to protect the bondholders against financial losses when the issuer fails to do it. What motivates issuers to purchase Bond Insurance is that thus they can obtain higher ratings, and consequently it leads to significant interest cost savings.

A special type of Bond Insurance is Municipal Bond Insurance which is an insurance policy underwritten by a private insurance company which specifically safeguards municipal bonds.

Bond Insurance policies are available from a wide range of large insurance companies throughout the country, but they can also be obtained from "monoline" companies specializing in Municipal Bond Insurance. Normally the premium the issuer will have to pay will directly depend on the estimated risk of the issuer's insolvency.

Bond Insurance is rightfully said to be highly gainful for two basic reasons: it makes bonds more attractive to investors and it favors bond issuers as it lowers their borrowing costs.