What happens if a monoline insurer is downgraded?
Because an insured bond carries the rating of the bond insurer, the bond’s rating will be downgraded when a monoline insurer is downgraded. With a lower credit rating, the market value (i.e., price) of the underlying municipal bond could fall because the perceived risk of owning the bond has increased. The presence of an insurance policy alone does not guarantee a municipal bond’s price in the secondary market. As with any other security, the actual price is determined by the market at the time of resale. Municipal bonds sold prior to maturity may be worth more or less than their original cost. Generally, if the price of a municipal bond drops, higher yields will follow. As noted above, however, some issuers obtain bond insurance primarily to lower their costs of borrowing. If these issuers carry a credit rating independent of the credit rating from the monoline insurer, market participants may “look through” or disregard the downgrade of the insurer. Depending on the market at the tim
