What does bond insurance typically provide in exchange for an upfront premium?

Bond insurance is designed to enhance the credit quality of a bond issuance. By obtaining bond insurance, the issuer secures a guarantee from the bond insurer that they will make the scheduled principal and interest payments to bondholders in the event the issuer defaults on these obligations. This guarantee typically elevates the credit rating of the insured bonds to a higher level, often to a Triple A rating, which is the highest grade assigned.

This Triple A rating not only signals to investors that the bonds are of lower credit risk but also allows the issuer to borrow at lower interest rates. The premium paid for the bond insurance compensates the insurer for taking on this risk. Consequently, the insurance effectively leverages the financial backing of a highly rated insurer to improve the perceived safety of the bonds, thereby potentially enabling the issuer to attract more investors and secure more favorable borrowing terms.