American Municipal Bond Assurance Corporation
What Is American Municipal Bond Assurance Corporation?
The American Municipal Bond Assurance Corporation (Ambac) offers insurance against default on municipal bond offerings.
Grasping American Municipal Bond Assurance Corporation
The American Municipal Bond Assurance Corporation (Ambac) started in 1971 as a subsidiary of MGIC Investment Corporation of Milwaukee. It was the primary company to offer insurance for issuers of municipal bonds. A municipal bond issuer might purchase insurance coverage to increase investor confidence that principal and interest payments will be made in full and on time in the event that the issuer defaults. The insurance acts as a defense against default, decreasing the risk, and raising the credit rating of the bonds issued. The extra confidence produced by this coverage means insured bonds can command higher prices, pay lower interest rates and generally appreciate more liquidity than uninsured bonds.
Ambac stays among the major bond insurers and the market for insurance keeps on flourishing, however Ambac's credit ratings declined sharply following the financial crisis of 2008. The organization presently goes under the name Ambac Assurance Corporation and fills in as a major operating unit of Ambac Financial Group, a New York-based holding company.
Bond Insurance
Bond insurance works along these lines to some other insurance policy. Issuers take out insurance against default and a bond insurer prices premium payments in light of the risk it sees from the issuer. Assuming the issuer neglects to make convenient payments during the duration of the bond, the insurer must make those payments all things being equal. This dynamic means an investor ordinarily considers an insured bond to have a similar credit rating as the firm guaranteeing the bond, no matter what the credit rating of the underlying securities. According to an investor's point of view, the main risk of default comes from the chance that the bond insurer neglects to make payments. Generally, bond insurers just cover securities whose underlying ratings lie in investment-grade an area, or no lower than BBB.
While bond issuers must pay insurance premiums, the improved creditworthiness of the debt can yield critical benefits by working on the terms of the loan, basically by bringing down yields or by extending an issuer's access to debt markets. To the degree that those superior loan terms reduce the cost of borrowing more than the increased cost produced by insurance premiums, the bond issuer outpaces the competition. In functional terms, investors additionally end up paying for insurance premiums to the degree that they take lower returns on debt that would open them to higher risk, and accordingly yield higher returns, assuming it were uninsured.
Features
- The American Municipal Bond Assurance Corporation (Ambac) started in 1971 as a subsidiary of MGIC Investment Corporation of Milwaukee and offers insurance against default on municipal bond offerings.
- Ambac at present goes under the name Ambac Assurance Corporation and fills in as a major operating unit of Ambac Financial Group, a New York-based holding company.
- Ambac is one of the major bond insurers however its credit ratings declined steeply following the financial crisis of 2008.
