The Effect of Increased Use of Insurance on Default Risk of Municipal Bonds

The purpose of this paper is to evaluate the growing trend towards the use of third party insurers to increase the creditworthiness and reduce the risks of municipal securities. With default risks still rising rapidly at the state and local level, there are many misconceptions about the safety of municipal bonds backed by insurers, who, oftentimes are in serious financial trouble themselves. Chapter One will give a quick overview and a short history of municipal bonds and how they achieved tax exempt status. Chapter Two will examine municipals in much greater detail, defining both municipal bonds and the concept of default, as well as an in-depth study of all factors currently affecting the municipals market. Chapter Three will begin the study of the third party insurer, examining what\u27s insured, the process involved, its effects, the types of insurance available, and the major players. Chapter Four will cover the faults in this safety net, citing recent developments involving the insurers and insured issues. The last Chapter will assess the future conditions that will impact the market in addition to covering recommended investment strategies. With the stock market poised for correction, an administration vowing to raise taxes in a variety of areas, and fewer options for tax sheltered income, the muni market is increasingly attractive to a variety of investors. A study of this so called safe investment was needed. After reviewing this paper, the reader will be able to make intelligent investment decisions not only regarding the insured municipals market, but the municipals market as a whole