SIE Understanding Products and Their Risks Question 8: Answer and Explanation

Question: 8

Which of the following is an effect of municipal bond insurance?

• A. A private insurance company pays the municipal government for shortfalls in project revenue.
• B. A private insurance company pays the municipal government for shortfalls in tax revenue.
• C. An insured bond issue will have a higher credit rating than a noninsured issue.
• D. An insured bond issue will have no credit rating.

Correct Answer: C

Explanation:

C: An insured bond issue having a higher credit rating than a noninsured issue is an effect of municipal bond insurance. Choices A and B are not effects of municipal bond insurance because the insurance protects the bondholder against default on the bond by the municipality. Choice D is incorrect because the bond issue would continue to have a credit rating, which would be higher.