Bond insurance: Difference between revisions
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Many bond insurers suffered substantial losses in the [[2007 Subprime mortgage financial crisis]], as a correlated reduction in the credit ratings of the insured bonds increased the chance of default beyond the levels that their models could guarantee handling. |
Many bond insurers suffered substantial losses in the [[2007 Subprime mortgage financial crisis]], as a correlated reduction in the credit ratings of the insured bonds increased the chance of default beyond the levels that their models could guarantee handling. |
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Analyses indicating that [[municipal bonds]] tended to default more rarely than the bond-insurance models would have suggested, and therefore that insurance on municipal bonds was generally much more expensive than its value, led various large municipalities to issue uninsured bonds in late 2007 <ref>[http://www.bloomberg.com/apps/news?pid=20601087&sid=a3elagQNR26E&refer=home]</ref>; at the time <ref>[http://www.nysun.com/article/67018?page_no=2]</ref> some insured bonds were offering higher rates than their uninsured counterparts, as doubts as to the solvency of bond insurers meant the expected value of the insurance was not necessarily positive. |
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[[Category:Bonds]] |
[[Category:Bonds]] |
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Revision as of 12:05, 3 December 2007
Bond insurance is a service whereby holders of a bond can pay a premium to a third party, who will provide interest and capital repayments as specified in the bond in the event of the failure of the issuer so to do.
The premium requested for insurance on a bond is a measure of the perceived risk of failure of the issuer.
Government bonds are almost never insured; municipal bond insurance was introduced in the US in 1971, and by 2002 over 40% of municipal bonds were insured, often by a procedure involving payment of a single premium at the purchase of the bond.
Major bond insurers
The major bond insurers in the US include AMBAC, CIFG, FGIC, AGC and MBIA Insurance Corporation. [1]
Bond insurance problems in 2007
Many bond insurers suffered substantial losses in the 2007 Subprime mortgage financial crisis, as a correlated reduction in the credit ratings of the insured bonds increased the chance of default beyond the levels that their models could guarantee handling.
Analyses indicating that municipal bonds tended to default more rarely than the bond-insurance models would have suggested, and therefore that insurance on municipal bonds was generally much more expensive than its value, led various large municipalities to issue uninsured bonds in late 2007 [1]; at the time [2] some insured bonds were offering higher rates than their uninsured counterparts, as doubts as to the solvency of bond insurers meant the expected value of the insurance was not necessarily positive.