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Bond Insurance Terminology
Bond insurance, also called financial guarantee insurance, is a specific type of insurance for financial markets. Bond insurance guarantees that the insurance company will back the interest payments and principal on a bond if the issuer of the bond should default, or be unable to pay. Below are some popular terms often used in relation to bond insurance.
Surety Bond – A type of bond where one party agrees to pay another party if a certain obligation by a third party is not kept. Surety bonds are usually used by a commercial agency during the bail and bonding process with persons who are able to be released from jail pending their trial date. If the person does not attend their trial, then the surety bond guarantees their full bail will be paid.
Notary – A notary public is a civil official whose job it is witness the drawing up of bonds. For a bond to be valid, it usually must be witnessed by a notary.
Municipal Bond – A bond issued by a local government, not a business or corporate entity. Holders of these bonds are exempt from paying federal taxes on their interest.
Asset-backed Security – Sometimes abbreviated as ABS, this is a security bond whose payment is backed up by assets. These can include mortgage loans, corporate holdings, royalty payments and even movie revenues. During the global crisis of 2008, many ABS securities that were linked to mortgages fell into trouble.
Performance – The rating system for securities that is used by many bond insurers for rating a commercial or government agency. The triple A rating is the example of the highest performing bond. Oftentimes, premiums for bond insurers are based on the performance rating, which is a sign of how likely the issuer will not be likely to default.
When looking into getting bond insurance, first determine the type of bond you have. If you don't yet have any bonds, research your options. Unlike stocks, which give the holder a share of the company they were issued from, bonds are a loan that must be paid back with interest by the surety, which is the entity that issued the bond. In general, the benefit of an insured bond is the guaranty of payback. The principal amount and the interest must be paid back at a set increment and within a length of time. To get insurance, the liability then falls on the insurer, not the issuer. There are many types of bonds. One type that many have heard of is for bail. This would be held by the company putting up the bail. There are many different types, and the value of them depends on where they are from. For example, municipal bonds are issued by a municipality and will generally have a lower interest rate than that of a large commercial corporate entity. In this scenario, the surety is the city. Look online to find an agency. Call around to speak to the brokers to get advice on the type of bond you should invest in. Explain that you want those with insurance. An agency broker will be able to tell you the climate of the market and the viability of getting a certain type over another, and give you a quote for their services. Ask as many questions as you can think of, like the pros and cons of commercial and corporate bonds compared to municipal bonds.