Question

Why would a municipal bond issuer want to purchase third-party insurance on the bond payments?

A. Bond insurance ensures payment to bondholders in the event that the issuer defaults on a payment.

B. The bond issued will have the credit rating of the insurance company. This helps improve the credit ratings of bond issuers and lowers interest rates on bonds backed by insurance substantially.

C. Both A & B are correct

D. Only A is correct

Answer 1

Both of the given statements are true because Bond insurance will be securing payment to the bond holder in event any kind of default is made by issuer and it will also help in enhancing the credit rating of the bond issuer.

Even though municipal bonds are considered safe but government can be facing liquidity crunch and investors want to have complete security so Bond issued will be buying third party Insurance.

These Bond insurance will be helping these Bond issue with higher credit rating and they will be making the bond more lucrative for the investors.

Correct answer will be option (C) Both A & B are correct.