A bond is basically a loan in which the lender is a common everyday consumer and the borrower is the government, an agency, or a company. The U.S. Treasury, municipalities, and companies issue or sell bonds to obtain certain amounts of money to fund their day-to-day operations or to finance specific projects. Purchase of bonds enables the borrower to invest cash that will eventually be returned, sometimes with added interest.
Because bonds are actually loans, the amount of the bond is the principle, and interest is paid on the principle: usually at a fixed rate. Bond insurance protects the issuer if they are unable to follow through on their end of the “bond bargain.” By paying an insurance premium, the bond issuer gains the security of knowing that the principle and interest of the bond will be paid for if the issuer in unable to do so.
How bonds are classified depends on several factors, including:
- Performance to guarantee the performance of contractually agreed upon work
- Bid guarantees the beginning of work following the winning of a bid
- Indemnity guarantees any losses should a party fail to meet deadlines
- Payment promises payment to all sub-contractors and vendors
- License a bond guaranteed to a state or federal agency
- Whether or not they are or secured or unsecured
- Maturity rating
- Tax status
- Financial reliability of the issue
Bond insurance, therefore, will correspond to the rating of the bond and is calculated based on the risk of failure to repay the bond. The only bonds that are not usually insured are government bonds, since the risk of failure to repay is minor.
When a bond issuer wants to assure potential investors that a bond is really and truly safe, they often turn to a bond insurer, like Mahoney & Obara Insurance Agency, Inc. We can make both you and your potential investors feel comfortable and secure with their bond purchase. Simply fill out our quick and easy online form or call us at 508-853-9085 today for a free secure bond insurance quote.