Describe the different forms of financial guaranteesseen in the bond m

QUESTION

Describe the different forms of financial guaranteesseen in the bond markets.
Municipal Bond Municipal bond insurance was introduced in the U.S. in 1971 by American Municipal Bond Assurance Corp. (subsequently renamed AMBAC and later œAmbac), the first of the financial guaranty corporations, being a separately capitalized insurance company formed for the purpose of insuring bonds. Monoline Bond Bond insurance of residential mortgage-backed securities (RMBS) commenced in the 1980s but expanded at an accelerated pace in the 2000s, leading up to the 2008 financial crisis. As the housing bubble grew in the mid-2000s, bond insurers generally increased the collateral protection required for RMBS. However, both the bond insurers and the rating agencies that evaluated their credit did not anticipate the collapse of the real estate market that precipitated the financial crisis and the magnitude of the disruption to the residential mortgage market that accompanied the financial crisis. In addition, following the crisis, the bond insurers became aware that many RMBS they had insured included large percentages of loans that were ineligible for securitization and were subject to repurchase obligations by the RMBS sponsors who originated the securitizations based upon certain representations and warranties¦

e by the sponsors of such loans. Business model Bond insurance generally reduces the borrowing costs for an issuer since investors are prepared to accept a lower interest rate in exchange for the credit enhancement provided by the bond insurance. The interest savings from the use of bond insurance are generally shared between the issuer (as its incentive to use the insurance) and the insurer (as its premium for providing the insurance). Since an issuer generally has the option of selling its securities with or without insurance, the issuer will generally only use insurance when doing so results in overall cost savings acceptable to the issuer. Municipal bond insurance premiums are generally paid up-front as a lump sum; while non-municipal bond insurance premiums are generally paid in periodic installments over time.

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