What is the role of "municipal bond insurance"?

Municipal bond insurance plays a critical role in enhancing the credit quality of municipal bonds. When a bond is insured, the insurance company guarantees the repayment of the bond's principal and interest in the event of a default by the issuer. This assurance makes the bonds more attractive to investors, as it significantly reduces their risk. When investors feel more secure about the likelihood of receiving their money back, the bonds often sell at a lower yield, which can benefit the issuing municipality by allowing them to borrow at better rates.

The presence of municipal bond insurance not only boosts investor confidence but also can potentially lower borrowing costs for municipalities. This mechanism is especially important during economic downturns or for municipalities with weaker credit ratings. By acting as a safety net for investors, municipal bond insurance plays an essential role in the functioning of the municipal bond market.