MBIA Inc. is an American financial services company. It was founded in 1973 as the Municipal Bond Insurance Association . It is headquartered in Purchase, New York , and as of January 1, 2015 had approximately 180 employees. MBIA is the largest bond insurer .
86-422: MBIA is a monoline insurer primarily of municipal bonds and on asset-backed securities and mortgage-backed securities . Financial insurance or Financial Guarantees are a form of credit enhancement . It also provides a fixed-income asset management service with about US$ 40 billion under management. A consortium of insurance companies ( Aetna , Fireman's Fund , Travelers , Cigna , and Continental ) formed
172-408: A Chapter 11 bankruptcy at the giant telecommunications company Worldcom , in 2004 its bondholders ended up being paid 35.7 cents on the dollar. In a bankruptcy involving reorganization or recapitalization, as opposed to liquidation, bondholders may end up having the value of their bonds reduced, often through an exchange for a smaller number of newly issued bonds. A number of bond indices exist for
258-458: A tap issue or bond tap . Nominal, principal, par, or face amount is the amount on which the issuer pays interest, and which, most commonly, has to be repaid at the end of the term. Some structured bonds can have a redemption amount which is different from the face amount and can be linked to the performance of particular assets. The issuer is obligated to repay the nominal amount on the maturity date. As long as all due payments have been made,
344-462: A bond insurance subsidiary that was owned by Radian Asset but never launched, renamed it Municipal Assurance Corp. ("MAC"), and launched the new company as a municipal-only bond insurer in July 2013. Bond (finance) In finance , a bond is a type of security under which the issuer ( debtor ) owes the holder ( creditor ) a debt , and is obliged – depending on the terms – to provide cash flow to
430-410: A bond is a form of loan or IOU . Bonds provide the borrower with external funds to finance long-term investments or, in the case of government bonds , to finance current expenditure. Bonds and stocks are both securities , but the major difference between the two is that (capital) stockholders have an equity stake in a company (i.e. they are owners), whereas bondholders have a creditor stake in
516-497: A bond will immediately affect mutual funds that hold these bonds. If the value of the bonds in their trading portfolio falls, the value of the portfolio also falls. This can be damaging for professional investors such as banks, insurance companies, pension funds and asset managers (irrespective of whether the value is immediately " marked to market " or not). If there is any chance a holder of individual bonds may need to sell their bonds and "cash out", interest rate risk could become
602-404: A centralized exchange or trading system. Rather, in most developed bond markets such as the U.S., Japan and western Europe, bonds trade in decentralized, dealer-based over-the-counter markets. In such a market, liquidity is provided by dealers and other market participants committing risk capital to trading activity. In the bond market, when an investor buys or sells a bond, the counterparty to
688-402: A company (i.e. they are lenders). As creditors, bondholders have priority over stockholders. This means they will be repaid in advance of stockholders, but will rank behind secured creditors , in the event of bankruptcy. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks typically remain outstanding indefinitely. An exception
774-465: A lower interest rate in exchange for the credit enhancement provided by the insurance. The interest savings are generally shared between the issuer (as its incentive to use the insurance) and the insurer (as its insurance premium). Since an issuer has the option of selling its securities with or without insurance, it will generally only use insurance when doing so results in overall cost savings. Municipal bond insurance premiums are generally paid up-front as
860-633: A lump sum or in installments. The premium charged for insurance on a bond is a measure of the perceived risk of failure of the issuer. It can also be a function of the interest savings realized by an issuer from employing bond insurance or the increased value of the security realized by an owner who purchased bond insurance. Bond insurers are "monoline" by statute, which means that companies that write bond insurance do not participate in other lines of insurance such as life, health, or property and casualty. The term monoline does not mean that insurers operate only in one securities market, such as municipal bonds, as
946-575: A lump sum; while non-municipal bond insurance premiums are generally paid in periodic installments over time. In July 2008, the Association of Financial Guaranty Insurers ("AGFI"), the trade association of financial guaranty insurers and reinsurers, estimated that, since its inception in 1971, the bond insurance industry had saved municipal bond issuers and their taxpayers $ 40 billion. A majority of insured securities today are municipal bonds issued by states, local governments and other governmental bodies in
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#17330851245781032-497: A monoline business, limiting industry members to writing bond insurance and closely related lines of insurance that include surety, credit, and residual-value insurance. The monoline restriction also prevented other types of insurance companies from offering financial guaranty insurance. A cited rationale for the monoline approach was to simplify regulation and help ensure capital adequacy. The 1990s saw industry members insure both municipal bonds and asset-backed securities (ABS). At
1118-429: A price of 100), their prices will move towards par as they approach maturity (if the market expects the maturity payment to be made in full and on time) as this is the price the issuer will pay to redeem the bond. This is referred to as " pull to par ". At the time of issue of the bond, the coupon paid, and other conditions of the bond, will have been influenced by a variety of factors, such as current market interest rates,
1204-497: A price of 75.26, indicates a selling price of $ 752.60 per bond sold. (Often, in the US, bond prices are quoted in points and thirty-seconds of a point, rather than in decimal form.) Some short-term bonds, such as the U.S. Treasury bill , are always issued at a discount, and pay par amount at maturity rather than paying coupons. This is called a discount bond. Although bonds are not necessarily issued at par (100% of face value, corresponding to
1290-419: A real problem, conversely, bonds' market prices would increase if the prevailing interest rate were to drop, as it did from 2001 through 2003. One way to quantify the interest rate risk on a bond is in terms of its duration . Efforts to control this risk are called immunization or hedging . There is no guarantee of how much money will remain to repay bondholders. As an example, after an accounting scandal and
1376-558: A small portion of the bonds, and holders of the insured debt received full and timely payment from Ambac, which demonstrated the value of bond insurance to the market. This proved to be a watershed moment for the bond insurance industry, igniting steady growth in demand for many years. During the 1980s, other participants emerged in the sector including Bond Investors Guaranty Insurance Company ("BIG") (1985) and Capital Markets Assurance Corp. ("CapMac") (1988), both of which were subsequently acquired by MBIA; Capital Guaranty Corp. (1986), which
1462-707: A year and a fixed lump sum at maturity is attractive. Bondholders also enjoy a measure of legal protection: under the law of most countries, if a company goes bankrupt , its bondholders will often receive some money back (the recovery amount ), whereas the company's equity stock often ends up valueless. However, bonds can also be risky but less risky than stocks: Bonds are also subject to various other risks such as call and prepayment risk, credit risk , reinvestment risk , liquidity risk , event risk , exchange rate risk , volatility risk , inflation risk , sovereign risk and yield curve risk . Again, some of these will only affect certain classes of investors. Price changes in
1548-446: Is a 12-digit alphanumeric code that uniquely identifies debt securities. In English , the word " bond " relates to the etymology of "bind". The use of the word "bond" in this sense of an "instrument binding one to pay a sum to another" dates from at least the 1590s. Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets . The most common process for issuing bonds
1634-399: Is an irredeemable bond, which is a perpetuity , that is, a bond with no maturity. Certificates of deposit (CDs) or short-term commercial paper are classified as money market instruments and not bonds: the main difference is the length of the term of the instrument. The most common forms include municipal , corporate , and government bonds . Very often the bond is negotiable, that is,
1720-408: Is commonly used for smaller issues and avoids this cost, is the private placement bond. Bonds sold directly to buyers may not be tradeable in the bond market . Historically, an alternative practice of issuance was for the borrowing government authority to issue bonds over a period of time, usually at a fixed price, with volumes sold on a particular day dependent on market conditions. This was called
1806-620: Is more highly rated than the issuer. Following the global financial crisis of 2008, municipal market events have helped to refocus investors and issuers on the benefits that bond insurance provides. A number of well-publicized municipal defaults, bankruptcies and restructurings occurred, which proved that bond insurance remains valuable in the public finance market. For example, holders of insured bonds were kept whole by Assured Guaranty and National Public Finance Guarantee in situations involving Detroit, Michigan; Jefferson County, Alabama; Harrisburg, Pennsylvania; Stockton, California and Puerto Rico. In
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#17330851245781892-427: Is only partially correct. Bonds do suffer from less day-to-day volatility than stocks, and bonds' interest payments are sometimes higher than the general level of dividend payments. Bonds are often liquid – it is often fairly easy for an institution to sell a large quantity of bonds without affecting the price much, which may be more difficult for equities – and the comparative certainty of a fixed interest payment twice
1978-429: Is the definition of the redemption yield on the bond, which is likely to be close to the current market interest rate for other bonds with similar characteristics, as otherwise there would be arbitrage opportunities. The yield and price of a bond are inversely related so that when market interest rates rise, bond prices fall and vice versa. For a discussion of the mathematics see Bond valuation . The bond's market price
2064-402: Is the insurer's responsibility, not the investor's. The insurance may also improve market liquidity for the insured securities. The uninsured bonds of an individual issuer may trade infrequently, while bonds trading in the insurer's name are more likely to be actively traded on a daily basis. Investors in insured bonds are also protected from rating downgrades of issuers, so long as the insurer
2150-434: Is the rate of return received from investing in the bond. It usually refers to one of the following: The quality of the issue refers to the probability that the bondholders will receive the amounts promised at the due dates. In other words, credit quality tells investors how likely the borrower is going to default. This will depend on a wide range of factors. High-yield bonds are bonds that are rated below investment grade by
2236-421: Is through underwriting . When a bond issue is underwritten, one or more securities firms or banks, forming a syndicate , buy the entire issue of bonds from the issuer and resell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. Primary issuance is arranged by bookrunners who arrange the bond issue, have direct contact with investors and act as advisers to
2322-453: Is usually expressed as a percentage of nominal value: 100% of face value, "at par", corresponds to a price of 100; prices can be above par (bond is priced at greater than 100), which is called trading at a premium, or below par (bond is priced at less than 100), which is called trading at a discount. The market price of a bond may be quoted including the accrued interest since the last coupon date. (Some bond markets include accrued interest in
2408-445: The SEC . In January 2017, MBIA UK was acquired by Assured Guaranty Ltd together with its subsidiary Assured Guaranty Corp. Monoline insurance Bond insurance , also known as " financial guaranty insurance ", is a type of insurance whereby an insurance company guarantees scheduled payments of interest and principal on a bond or other security in the event of a payment default by
2494-446: The credit rating agencies . As these bonds are riskier than investment grade bonds, investors expect to earn a higher yield. These bonds are also called junk bonds . The market price of a tradable bond will be influenced, among other factors, by the amounts, currency and timing of the interest payments and capital repayment due, the quality of the bond, and the available redemption yield of other comparable bonds which can be traded in
2580-590: The 2000s leading up to the 2008 financial crisis. Bond insurers were also exposed to residential mortgage debt through collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs) backed by subprime mortgage debt. The insurers had sold credit default swap (CDS) protection on specific tranches of CDOs. This business contributed to the monolines' growth in the early 2000s, with $ 3.3 trillion insured in 2006, with that contingent liability backed by approximately $ 47 billion of claims-paying resources. These exposures were all in compliance with Article 69 of
2666-442: The 2008 financial crisis, bond insurers suffered few material losses. Notable exceptions in the municipal sector include: As publicbonds.org points out, a 1994 BusinessWeek article called MBIA "an almost perfect money machine". The BusinessWeek story noted that, as of that time, MBIA had seen only one loss. By the late 1990s and early 2000s, about 50% of U.S. municipal bonds were insured. Although penetration of insurance in
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2752-487: The Municipal Bond Insurance Association in 1973 to diversify their holdings in municipal bonds. The company went public in 1987. In 2002, Bill Ackman , a hedge fund manager, began research which concentrated on challenging MBIA's AAA rating, despite an ongoing probe of his trading by New York State and federal authorities. He was charged copying fees for copying 725,000 pages of statements regarding
2838-789: The New York Insurance Law and other states' financial guaranty insurance statutes and with capital adequacy guidelines set by the rating agencies. As the housing bubble grew in the mid-2000s, bond insurers generally increased the collateral protection required for the RMBS they guaranteed. But when the housing market declined, defaults soared to record levels on subprime mortgage loans and new types of adjustable rate mortgage (ARM) loans—interest-only, option-ARM, stated-income, and so-called "no income no asset" (NINA) loans—that had been developed and issued in anticipation of continuing appreciation in housing prices. The subsequent real estate market decline
2924-566: The New York State Insurance Department (NYID) issued guidance regarding insurance of obligations under credit default swaps, which facilitated the participation by financial guaranty insurers in the CDS market. The NYID guidance was subsequently codified by amendments to Article 69 of the New York Insurance Law. In 2001, Radian Group Inc. acquired Enhance Reinsurance Company and its affiliate, Asset Guaranty Insurance Company, renaming
3010-524: The New York State Insurance Department, FGIC ceased paying claims in 2010 and is in run-off, now paying claims in part. Syncora Guarantee Inc. ("Syncora"), CIFG, Radian Asset and Ram Re remained solvent but have generally not written new business. Ram Re has been renamed American Overseas Reinsurance Company Ltd. and has redomesticated to Barbados. The company never filed for bankruptcy and is writing new lines of insurance while it runs off its financial guaranty book. In January 2012, Assured Guaranty acquired
3096-563: The New York Stock Exchange due to low market price and negative net worth, although ACA retained its single-A rating. On December 19, 2007, the company was downgraded to triple-C by Standard & Poor's. Downgrades of major triple-A monolines began in December 2007, resulting in downgrades of thousands of municipal bonds and structured financings insured by the companies. In 2007 Warren Buffett's Berkshire Hathaway Assurance entered
3182-423: The RMBS and were subject to repurchase by the RMBS sponsors. As provided under the insurance contracts, the insurers "put back" to the sponsors such loans, which breached applicable representations and warranties ("R&W") regarding what was in the securitizations, i.e., they demanded the sponsors buy the loans out of the pool, as required under the contracts. Such "putbacks" have remained subject to litigation into
3268-528: The United States and in certain other countries. Bond insurance has also been applied to infrastructure project financing, such as those for public-private partnerships, bonds issued by non-U.S. regulated utilities, and U.S. and non-U.S. asset-backed securities ("ABS"). Financial guaranty insurers withdrew from the residential mortgage-backed securities ("RMBS") market after the 2008 financial crisis. Investors purchasing or holding insured securities benefit from
3354-509: The additional payment source provided by the insurer if the issuer fails to pay principal or interest when due (which reduces the probability of a missed payment to the probability that not only the issuer but also the insurer defaults). The value proposition of bond insurance includes the insurers' credit selection, underwriting, and surveillance of the underlying transactions. Significantly, uninsured transactions are often not monitored by rating agencies following their initial rating issuance. In
3440-533: The asset-backed securities (ABS) sector before the 2008 financial crisis. In 1989, New York State enacted a new Article 69 of the New York State Insurance Law, which established "financial guaranty insurance" as a separate line of insurance. Article 69 excluded financial guaranty insurers from coverage under the property/casualty insurers security fund, which covered payments owed by insolvent insurers. It also established financial guaranty insurance as
3526-513: The bond includes embedded options , the valuation is more difficult and combines option pricing with discounting. Depending on the type of option, the option price as calculated is either added to or subtracted from the price of the "straight" portion. See further under Bond option § Embedded options . This total is then the value of the bond. More sophisticated lattice- or simulation-based techniques may (also) be employed. Bond markets, unlike stock or share markets, sometimes do not have
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3612-462: The bond insurers faced billions of dollars of claims on insured RMBS, with uncertain prospects for recoveries from the sponsors (creators) of those RMBS. Monoline insurers posted higher reserves for losses as these insured securities appeared headed for default. Following the crisis, the bond insurers became aware that many RMBS they had insured included large percentages of loans that were ineligible for securitization, i.e., they should not have been in
3698-474: The bond issuer in terms of timing and price of the bond issue. The bookrunner is listed first among all underwriters participating in the issuance in the tombstone ads commonly used to announce bonds to the public. The bookrunners' willingness to underwrite must be discussed prior to any decision on the terms of the bond issue as there may be limited demand for the bonds. In contrast, government bonds are usually issued in an auction. In some cases, both members of
3784-431: The bonds to match their liabilities, and may be compelled by law to do this. Most individuals who want to own bonds do so through bond funds . Still, in the U.S., nearly 10% of all bonds outstanding are held directly by households. The volatility of bonds (especially short and medium dated bonds) is lower than that of equities (stocks). Thus, bonds are generally viewed as safer investments than equities, but this perception
3870-487: The business of insuring asset-backed securities (ABS). These became known as the "big four" bond insurers. By 1980, about 2.5% of long-term municipal bonds were insured. In 1983, the Washington Public Power Supply System (WPPSS) defaulted on $ 2.25 billion of revenue bonds relating to troubled nuclear power projects. Most of the 30,000 bondholders lost 60-90 cents on the dollar. Ambac had insured
3956-481: The companies Radian Reinsurance Inc. and Radian Asset Assurance Inc. ("Radian Asset"), respectively. Both companies engaged in financial guaranty insurance and reinsurance. In June 2004, Radian Reinsurance and Radian Asset Assurance merged, with the surviving corporation being Radian Asset. Bond insurers had guaranteed the performance of residential mortgage-backed securities (RMBS) since the 1980s, but their guaranties of that asset class expanded at an accelerated pace in
4042-445: The creditor (e.g. repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as interest (called the coupon ) over a specified amount of time. The timing and the amount of cash flow provided varies, depending on the economic value that is emphasized upon, thus giving rise to different types of bonds. The interest is usually payable at fixed intervals: semiannual, annual, and less often at other periods. Thus,
4128-490: The currency, the term of the bond (length of time to maturity) and the conditions applying to the bond. The following descriptions are not mutually exclusive, and more than one of them may apply to a particular bond: The nature of the issuer will affect the security (certainty of receiving the contracted payments) offered by the bond, and sometimes the tax treatment. Some companies, banks, governments, and other sovereign entities may decide to issue bonds in foreign currencies as
4214-509: The emergence of new reinsurers , such as Ram Reinsurance Company Ltd. ("Ram Re") and AXA Re Finance. In 1999, ACE Ltd. acquired Capital Re, and renamed the company "ACE Capital Re." ACE Capital Re was spun off from ACE Ltd. in 2004 and renamed Assured Guaranty Corp. ("AGC"). AGC's parent holding company, Assured Guaranty Ltd. ("Assured Guaranty"), engaged through its subsidiaries in both financial guaranty insurance – through AGC—and reinsurance—through Assured Guaranty Re Ltd. ("AG Re"). In 1999,
4300-501: The event of default of such transactions, bond trustees often fail to take appropriate remedial actions absent direction and indemnity from the bondholders (which is typically not forthcoming). In contrast, bond insurers frequently have the ability to work directly with issuers either to avoid defaults in the first place or to restructure debts on a consensual basis, without the need to obtain agreement from hundreds of individual investors. Litigation to obtain recovery, should it be necessary,
4386-529: The financial crisis and ensuing recession and recovery. The financial crisis precipitated many changes in the bond insurance industry, including rating agency downgrades, several companies ceasing to write new business, dramatic share value reductions, and consolidation among the insurers. The industry's primary regulators in New York also took action, as did their counterparts in Wisconsin. On November 7, 2007, ACA,
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#17330851245784472-414: The financial guaranty insurance completely. The slow reaction of the rating agencies in acknowledging this situation echoed their slow downgrading of subprime mortgage debt a year earlier. In 2008, the New York State Insurance Department (NYID) issued "Circular Letter No. 19", which described "best practices" for financial guaranty insurers, particularly relating to categories of securities that had damaged
4558-434: The financial services company, in his law firm's compliance with a subpoena. Ackman has called for a division between MBIA's bond insurers' structured finance business and their municipal bond insurance side, despite statements from the insurance companies that this would not be a viable option. He argued that the billions of dollars of credit default swap (CDS) protection MBIA had sold against various mortgage backed CDOs
4644-425: The first R&W trial to reach a judgment, Flagstar Bank was required to compensate Assured Guaranty in full for past and future claims. The amounts that Assured Guaranty caused R&W providers to pay or commit to pay through putbacks and settlements plus the amount of future projected losses that Assured Guaranty avoided through negotiated terminations totaled approximately $ 4.2 billion as of March 31, 2015. While
4730-505: The foreign currency may appear to potential investors to be more stable and predictable than their domestic currency. Issuing bonds denominated in foreign currencies also gives issuers the ability to access investment capital available in foreign markets. A downside is that the government loses the option to reduce its bond liabilities by inflating its domestic currency. The proceeds from the issuance of these bonds can be used by companies to break into foreign markets, or can be converted into
4816-402: The governmental unit, agency, or other issuer of the insured bonds or other securities is the result of the savings on interest costs, which reflects the difference between yield payable on an insured bond and yield payable on the same bond if it was uninsured—which is generally higher. Borrowing costs are generally reduced for issuers of insured bonds because investors are prepared to accept
4902-567: The industry in the financial crisis. In 2009, Assured Guaranty acquired FSA and subsequently renamed it Assured Guaranty Municipal ("AGM"), combining under the same ownership the two most highly rated bond insurers at that time. Assured Guaranty became the only bond insurer to write insurance continuously from the pre-crisis period to the present. Also in 2009, MBIA separated its municipal bond insurance business from its other mostly asset-backed business, and formed National Public Finance Guarantee Corp. ("National") as an investment-grade insurer with
4988-550: The issuer has no further obligations to the bond holders after the maturity date. The length of time until the maturity date is often referred to as the term or tenor or maturity of a bond. The maturity can be any length of time, although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a term shorter than 30 years. Some bonds have been issued with terms of 50 years or more, and historically there have been some issues with no maturity date (irredeemable). In
5074-422: The issuer of the bond or security. It is a form of "credit enhancement" that generally results in the rating of the insured security being the higher of (i) the claims-paying rating of the insurer or (ii) the rating the bond would have without insurance (also known as the "underlying" or "shadow" rating). The insurer is paid a premium by the issuer or owner of the security to be insured. The premium may be paid as
5160-413: The issuer receives are thus the issue price, less issuance fees. The market price of the bond will vary over its life: it may trade at a premium (above par, usually because market interest rates have fallen since issue), or at a discount (price below par, if market rates have risen or there is a high probability of default on the bond). Bonds can be categorised in several ways, such as the type of issuer,
5246-431: The issuing company's local currency to be used on existing operations through the use of foreign exchange swap hedges. Foreign issuer bonds can also be used to hedge foreign exchange rate risk. Some foreign issuer bonds are called by their nicknames, such as the "samurai bond". These can be issued by foreign issuers looking to diversify their investor base away from domestic markets. These bond issues are generally governed by
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#17330851245785332-492: The law of the market of issuance, e.g., a samurai bond, issued by an investor based in Europe, will be governed by Japanese law. Not all of the following bonds are restricted for purchase by investors in the market of issuance. The market price of a bond is the present value of all expected future interest and principal payments of the bond, here discounted at the bond's yield to maturity (i.e. rate of return ). That relationship
5418-422: The length of the term and the creditworthiness of the issuer. These factors are likely to change over time, so the market price of a bond will vary after it is issued. (The position is a bit more complicated for inflation-linked bonds.) The interest payment ("coupon payment") divided by the current price of the bond is called the current yield (this is the nominal yield multiplied by the par value and divided by
5504-406: The market for United States Treasury securities, there are four categories of bond maturities: The coupon is the interest rate that the issuer pays to the holder. For fixed rate bonds , the coupon is fixed throughout the life of the bond. For floating rate notes , the coupon varies throughout the life of the bond and is based on the movement of a money market reference rate (historically this
5590-422: The market. Also during this time, credit default swap markets quoted rates for monoline default protection that would have been typical for below-investment-grade credits. Structured credit issuance ceased, and many municipal bond issuers went to market without bond insurance. By January 2008, many insured municipal and institutional bonds were trading at prices as if they were uninsured, effectively discounting
5676-423: The markets. The price can be quoted as clean or dirty . "Dirty" includes the present value of all future cash flows, including accrued interest, and is most often used in Europe. "Clean" does not include accrued interest, and is most often used in the U.S. The issue price at which investors buy the bonds when they are first issued will typically be approximately equal to the nominal amount. The net proceeds that
5762-726: The municipal bond insurance business that had previously resided in MBIA. Continuing the trend of reorganization in 2008, Ambac ceased writing business and in 2010 was split into (i) a "segregated account" (with liability for asset-backed and certain other troubled policies) subject to a rehabilitation overseen by the Wisconsin Office of the Commissioner of Insurance and (ii) a "general account" for municipal bond insurance and certain other non-troubled policies. On November 8, 2010, Ambac's holding company filed for Chapter 11 bankruptcy. By order of
5848-499: The municipal bond market is far lower today than when numerous triple-A insurers were active, the ability of Assured Guaranty to continue insuring municipal bonds that were issued during a prolonged period of low interest rates and narrow credit spreads is evidence that a market continues to exist for municipal bond insurance. 1971 saw the introduction of municipal bond insurance in the U.S. by American Municipal Bond Assurance Corp. (subsequently renamed AMBAC and later "Ambac"). Ambac
5934-399: The only single-A rated insurer, reported a $ 1 billion loss, wiping out equity and resulting in negative net worth. On November 19, ACA noted in a 10-Q that if downgraded below single-A-minus, it would have to post collateral to comply with standard insurance agreements, and that—based on current fair values—the firm would be unable to do so. On December 13, 2007, ACA's stock was delisted from
6020-441: The ownership of the instrument can be transferred in the secondary market . This means that once the transfer agents at the bank medallion-stamp the bond, it is highly liquid on the secondary market. The price of a bond in the secondary market may differ substantially from the principal due to various factors in bond valuation . Bonds are often identified by their international securities identification number, or ISIN , which
6106-439: The price). There are other yield measures that exist such as the yield to first call, yield to worst, yield to first par call, yield to put, cash flow yield and yield to maturity. The relationship between yield and term to maturity (or alternatively between yield and the weighted mean term allowing for both interest and capital repayment) for otherwise identical bonds derives the yield curve , a graph plotting this relationship. If
6192-440: The public and banks may bid for bonds. In other cases, only market makers may bid for bonds. The overall rate of return on the bond depends on both the terms of the bond and the price paid. The terms of the bond, such as the coupon, are fixed in advance and the price is determined by the market. In the case of an underwritten bond, the underwriters will charge a fee for underwriting. An alternative process for bond issuance, which
6278-470: The rating agencies failed to anticipate the correlation of performance of the underlying securities. Specifically, these bond insurers and rating agencies relied on historical data that did not prove predictive of residential mortgage loan performance following the 2008 crisis, which witnessed the first-ever nationwide decline in housing prices. Notably, AGM and AGC did not insure such CDOs, which has allowed Assured Guaranty to continue writing business throughout
6364-475: The same time, the industry expanded into overseas markets in Europe, Asia, Australia, and Latin America. In the late 1990s and early 2000s, a new group of bond insurers emerged. These included ACA Financial Guaranty Corp. (1997); XL Capital Assurance Inc. ("XLCA") (2000), a subsidiary of XL Capital Ltd. that was spun off in 2006 and subsequently renamed "Syncora Guarantee Inc."; and CIFG (2001). This era also saw
6450-529: The second decade following the financial crisis. One indication of the extent of loan quality misrepresentation was a 2011 settlement between Assured Guaranty and Bank of America, which had purchased mortgage originator Countrywide. Under the terms of the settlement, Bank of America made a $ 1.1 billion payment to Assured Guaranty and agreed to cover 80% of up to $ 6.6 billion of Assured Guaranty's future paid losses from breaches of representations and warranties on 21 insured RMBS transactions. Subsequently, in 2013, in
6536-491: The secondary market, insured bonds have generally exhibited significant price stability relative to comparable uninsured bonds of distressed issuers. Additionally, investors were spared the burdens of negotiating or litigating to defend their rights. Although the financial crisis caused most bond insurers to cease issuing insurance policies, the insurance has continued to remain available from highly rated providers, including legacy insurers and new industry participants. Prior to
6622-406: The swaps for a large profit. Ackman reportedly attempted to warn regulators, rating agencies and investors about the bond insurers' high risk business models. The story of Ackman's battle with MBIA was turned into a book called Confidence Game (Wiley, 2010) by Bloomberg News reporter Christine Richard. He reported covering his short position on MBIA on January 16, 2009 according to the 13D filed with
6708-472: The term has sometimes been misconstrued. Although bond insurers are not the only monoline insurers, they are sometimes colloquially called "the monolines". Bonds insured by these companies are sometimes said to be "wrapped" by the insurer. Bond insurers generally insure only securities that have underlying or "shadow" ratings in the investment grade category, with unenhanced ratings ranging from "triple-B" to "triple-A". The economic value of bond insurance to
6794-652: The trade is almost always a bank or securities firm acting as a dealer. In some cases, when a dealer buys a bond from an investor, the dealer carries the bond "in inventory", i.e. holds it for their own account. The dealer is then subject to risks of price fluctuation. In other cases, the dealer immediately resells the bond to another investor. Bonds are bought and traded mostly by institutions like central banks , sovereign wealth funds , pension funds , insurance companies , hedge funds , and banks . Insurance companies and pension funds have liabilities which essentially include fixed amounts payable on predetermined dates. They buy
6880-545: The trading price and others add it on separately when settlement is made.) The price including accrued interest is known as the "full" or " dirty price ". ( See also Accrual bond .) The price excluding accrued interest is known as the "flat" or " clean price ". Most government bonds are denominated in units of $ 1000 in the United States , or in units of £100 in the United Kingdom . Hence, a deep discount US bond, selling at
6966-492: The widespread misrepresentations caused bond insurers to experience considerable losses on insured securities backed by residential mortgage loans (including first lien loans, second lien loans, and home equity lines of credit), the most severe losses were experienced by those that insured CDOs backed by mezzanine RMBS. Although the bond insurers generally insured such CDOs at very high attachment points or collateral levels (with underlying ratings of triple-A), those bond insurers and
7052-528: Was generally LIBOR , but with its discontinuation the market reference rate has transitioned to SOFR ). Historically, coupons were physical attachments to the paper bond certificates, with each coupon representing an interest payment. On the interest due date, the bondholder would hand in the coupon to a bank in exchange for the interest payment. Today, interest payments are almost always paid electronically. Interest can be paid at different frequencies: generally semi-annual (every six months) or annual. The yield
7138-420: Was going to be a problem. He also argued that it was not proper for MBIA, which was legally restricted from trading in CDS, to instead do it through a second corporation, LaCrosse Financial Products, which MBIA described as an "orphaned subsidiary". Ackman bought CDS against MBIA corporate debt as a way to bet that it would crash. When MBIA did, in fact, crash as the financial crisis of 2007–2008 climaxed, he sold
7224-447: Was subsequently acquired by FSA; and College Construction Loan Insurance Corporation ("Connie Lee") (1987), which was subsequently acquired by Ambac. The 1980s also saw the birth of monoline financial guaranty reinsurance companies, including Enhance Reinsurance Company ("Enhance Re") (1986) and Capital Reinsurance Company (1988). FSA insured the first collateralized debt obligation ("CDO") in 1988, and experienced only minor losses in
7310-442: Was the first separately capitalized insurance company formed for the purpose of insuring bonds. In 1973 Municipal Bond Insurance Association (subsequently renamed "MBIA") formed, followed by Financial Guaranty Insurance Company ("FGIC") in 1983. Financial Security Assurance Inc. ("FSA", now known as Assured Guaranty Municipal) formed in 1985. FSA was the first bond insurer organized to insure non-municipal bonds, and it established
7396-406: Was unprecedented in its severity and geographic distribution across the U.S., and was not anticipated by the bond insurers or the rating agencies that evaluated their creditworthiness. Unlike many other types of insurance, bond insurance generally provides an unconditional and irrevocable guaranty—although the insurers reserve the right to pursue contractual and other available remedies. As a result,
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