Insured municipal bonds are fixed-income security issued by local governments, such as cities or counties, to finance public projects. These bonds are backed by an insurance policy, which guarantees the payment of principal and interest to bondholders in the event of a default by the issuer. This insurance provides an additional layer of protection for investors and can result in a higher credit rating for the bond, making it more attractive to potential buyers.
What is the primary purpose of an insurance policy for an insured municipal bond?
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A) An insurance policy guarantees the payment of principal and interest to bondholders in the event of a default by the issuer, providing an additional layer of protection for investors. B) Insurance policies do not protect issuers from interest rate fluctuations. C) Insurance policies do not provide tax benefits to bondholders. D) While an insurance policy can result in a higher credit rating for the bond, its primary purpose is to guarantee the principal and interest payment to bondholders.
Which of the following is NOT a characteristic of an insured municipal bond?
A) Local governments issue insured municipal bonds. B) An insurance policy backs insured municipal bonds. C) General obligation bonds, not insured municipal bonds, are guaranteed by the full faith and credit of the issuer. D) Insured municipal bonds are used to finance public projects.
How does an insurance policy impact the credit rating of an insured municipal bond?
A) An insurance policy can impact the credit rating of an insured municipal bond. B) An insurance policy typically results in a higher, not lower, credit rating. C) An insurance policy can result in a higher credit rating for the bond, making it more attractive to potential buyers. D) An insurance policy does not cause the credit rating to fluctuate.
In the early 2000s, a city issued insured municipal bonds to finance the construction of a new sports stadium. The bonds were backed by an insurance policy, which guaranteed the payment of principal and interest to bondholders in the event of a default by the city. This insurance helped the bonds achieve a higher credit rating, making them more attractive to investors and allowing the city to secure the necessary funding for the project.
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Example Series 65 Example Practice Question
A small town decides to build a new library, and issues insured municipal bonds to finance the project. The insurance policy backing the bonds ensures that investors receive their principal and interest payments, even if the town encounters financial difficulties and cannot make the payments. This added layer of protection makes the bonds more appealing to investors, helping the town raise the necessary funds for the library.
Insured bonds, a safer bet, with insurance, there's no threat. Principal and interest paid, even if the issuer's waylaid.