What are Insured Municipal Bonds?

Malcolm Tatum
Malcolm Tatum

Insured municipal bonds are bonds issued by cities, towns, or other types of municipalities that are protected with some type of insurance arrangement. In the event that the issuer of the bonds is unable to honor the commitments made to the bondholders, the insurance coverage guarantees the terms and disburses funds that help to settle the debt owed to those investors. In many areas of the world, municipalities are required to take out insurance on bond issues, regardless of the bond rating. Some nations do not require insurance coverage on all bond issues; only those that earn over a specific rating are required to carry insurance protection.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

There are several benefits associated with the purchase of insured municipal bonds. One has to do with assuring investors that they will at least recoup their original investment, making it highly unlikely that the investor will sustain a loss. Some types of coverage go one step beyond this basic protection and even guarantee that the investor will receive the anticipated interest payments associated with the bond along with recouping the principal.

Another important benefit of insured municipal bond is the fact that theses bond issues tend to provide a higher yield than the bonds that are not insured. This means that the investor is likely to receive a greater return for his or her investment over the life of the bond issue. For investors who want to earn the highest amount of profit while still keeping risk levels as low as possible, insured municipal bonds are well worth his or her consideration.

In some instances, insured municipal bonds are tax-free. When this is the case, the investor tends to receive the maximum return possible from investment in the bond issue. Typically, the tax-free status applies to national or federal taxes only, although some local jurisdictions may also provide some sort of break on local taxes.

The degree of liquidity associated with insured municipal bonds can also work to the advantage of investors who find they need to sell some of their assets. Since the bond issues are guaranteed with the insurance coverage, finding interested buyers is normally a simple process. This is not necessarily the case with uninsured bond issues, since the degree of risk that the buyer would assume is somewhat more pronounced.

When considering different types of bond issues, going with insured municipal bonds is often an excellent choice. With little to nothing to lose, investors can look forward to avoiding losses in terms of the original investment, and have an asset on hand that can be sold for quick cash should the need arise. Bond issues of this type can usually be located with the help of a broker or dealer, making it a relatively easy task to identify and secure the right issues in a short period of time.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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