Bond insurance refers to a type of insurance policy purchased by a bond issuer to guarantee the repayment of the principal and interest payment to bondholders in the case of default. Once the bond issuer buys the insurance, their bond rating ceases to apply, and instead, the insurer’s credit rating applies.
Once the insurance is in place, the insurer automatically takes up the liability. Therefore, the insurer will make any principal and interest payments owed by the bond issuer. Consequently, even in the bond issuer defaulting event, bondholders shouldn’t experience much trouble.
It is a form of credit enhancement. The premium paid by the bond issuer to the insurer serves as a measure of the perceived risk of failure of the issuer.
Bond insurance has two main types: surety and fidelity, each offering a unique form of protection.
Surety bonds guarantee a business’s integrity towards completing a said job. It also ensures that the company will adhere to all laws and promises outlined on the contract. The widely-known types of surety bonds are contract bonds, and license and permit bonds. As the name suggests, contract bonds guarantee the contractor’s price, completion period, and the work to be done. On the other hand, license and permit bonds ensure that the business adheres to relevant license and permit regulations.
The other type of coverage is a fidelity bond, which offers protection against loss due to employee misconduct.
This type of insurance gives a business the ability to leverage its business growth. With the insurer’s credit rating in play, the company is better positioned to take bigger risks to grow it. While other businesses can purchase bond insurance, it is especially essential in the construction and financial sectors. Besides, the insurance allows a credit professional to offer unbiased criticism to the business in question.
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