DEFINITION of 'American Municipal Bond Assurance Corporation'

The first municipal bond insurance company, formed in 1971 as a subsidiary of MGIC Investment Corp. of Milwaukee; now more commonly known as Ambac Financial Group, Inc. The American Municipal Bond Assurance Corporation insures new municipal bond offerings worldwide and is one of the leading firms in its field. A municipal bond issuer may purchase insurance coverage in order to increase investor confidence that principal and interest payments will be made in full and on time if the issuer defaults.

BREAKING DOWN 'American Municipal Bond Assurance Corporation'

Because of the extra confidence generated by this coverage, insured bonds may be priced higher, have lower interest rates and be more liquid. As well, bonds insured by companies such as the Ambac Financial Group normally take on the credit rating of their insurance companies, raising investor confidence even more.

However, as a result of broadening its focus from insuring only bonds to insuring residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), Ambac and related companies saw their businesses weakened by the housing bust in 2007. As a result, investors should not rely as heavily on bond insurance companies to guarantee their investments.

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