Why do bond issuers buy insurance?
Bond issuers use bond insurance because it improves the credit quality of a bond, making it easier to sell. Bond insurance boosts credit quality by offering protection against default or downgrade if a bond issuer cannot meet its obligations to pay interest and principal to bondholders. Insured municipal bonds are rated based on the credit of the insurer (based on its claims-paying ability) rather than the underlying credit of the issuer. Historically, this has improved the credit rating of the bond. A higher credit rating allows the issuer to benefit from lower financing costs because bonds with high ratings—and, therefore, greater security —pay lower interest rates. This also leads to enhanced liquidity for insured bonds because there is greater demand among investors for highly rated securities. Accordingly, an issuer may seek bond insurance for a number of reasons. If a bond issuer’s credit would not earn a high rating, bond insurance could improve the credit quality of the bond. B
