Wrapped Bond

A bond (www.practicallaw.com/0-382-3387) that is guaranteed (www.practicallaw.com/8-382-3519) by a monoline (www.practicallaw.com/7-382-3633). A wrapped bond has the same credit rating (www.practicallaw.com/6-382-3370) as the insuring monoline which is generally higher than the credit rating of the bond issuer. As a result of the guarantee and higher credit rating, the issuer can obtain financing at a lower interest rate (www.practicallaw.com/9-382-3552) than it may have otherwise received. Wrapped bonds were originally used in municipal bond issuances but now are used to reduce the borrowing costs associated with a wide variety of financial products including project finance bonds and mortgage backed securities (www.practicallaw.com/2-384-8495). Following the 2007 subprime mortgage crisis and the increased number of mortgage defaults (www.practicallaw.com/0-382-3392), several monolines who insured these bonds were downgraded, resulting in reduced usage of wrapped bonds.

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