SIE practice questionmediumMunicipal Bonds — Insured Bonds
Municipal bond insurance provides which primary benefit?
- AIt protects against interest rate risk
- BIt makes the bond exempt from all taxes
- CIt guarantees timely payment of principal and interest, typically resulting in a higher credit rating✓ Correct answer
- DIt guarantees the bondholder will earn a profit
Explanation
Why C — It guarantees timely payment of principal and interest, typically resulting in a higher credit rating
Municipal bond insurance guarantees timely payment of principal and interest if the issuer defaults. Insured bonds typically receive the highest credit ratings (AAA), which lowers the required yield and reduces the issuer's borrowing costs. Insurance does NOT protect against interest rate risk (C), guarantee profits (A), or affect tax status (D).
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