Bond insurance

Bond insurance is a service whereby issuers 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 to do so. The effect of this is to raise the rating of the bond to the rating of the insurer; accordingly, a bond insurer's credit rating must be almost perfect.

The premium requested for insurance on a bond is a measure of the perceived risk of failure of the issuer.

The economic value of bond insurance to the governmental unit, agency, or company offering bonds is a saving in interest costs reflecting the difference in yield on an insured bond from that on the same bond if uninsured. Insured securities ranged from municipal bonds and structured finance bonds to collateralized debt obligations (CDOs) domestically and abroad.

National government bonds are almost never insured because governments can print money. In fact, for this reason, securities that are tied to or backed by government bonds are typically considered by ratings agencies to be high grade.

Municipal government bonds were insured by the so-called monolines starting in the 1970s. The financial crisis of 2008 seriously harmed their business model, to the point where their continued existence is in doubt.

Bond insurers are also called "financial guaranty insurance companies" or "financial guarantors".

Companies whose sole line of business is to provide bond insurance services to one industry are called monoline insurers. The term 'monoline' eventually became synonymous in some literature with terms like 'financial guarantors', and 'municipal bond insurers'.

Bonds which are insured by these companies are sometimes said to be 'wrapped' by the insurer.