DEFINITION of 'Insured Bond'

A bond with interest and principle payments insured by a third party. Insured bonds are usually found as a feature of municipal bonds; they are purchased, underwritten and repackaged by a financial guarantee company who then sells the issue to investors.

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BREAKING DOWN 'Insured Bond'

Insured bonds have higher credit ratings than bonds that are uninsured. The premium cost paid to the financial guarantee firm is passed along through lower coupon yields in the final issue.

Among the largest guarantee companies are Ambac Financial Group and MBIA, which underwrite thousands of municipal issues every year and have extremely high credit ratings. Very few default cases over the past 20 years have made insuring bonds a relatively inexpensive option for bond issuers.

An insured bond will be clearly noted in its description on most quote systems, such as the Bloomberg Terminal.

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