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Holders of bonds whose issuers default will not feel as if they found much of a bargain, of course.
And no one is dismissing the disruption that may come if some municipal bond issuers default on their payments.
Assuming that 10percentt of issuers default and that their bondholders recover about 30 cents on the dollar, both of which are conservative assumptions, then investors are still due 11percentt annually, or 7 percentage points more than Treasuries.
With $524 billion in insured debt, Ambac sells insurance policies promising to repay bondholders when bond issuers default.
On $1 million of mortgage borrowing, you're ahead $9,000 a year, unless the bond issuers default (a low risk but not a negligible one).
They made money by selling their findings to investors, and they did well if issuers' default rates matched those predicted by the ratings.
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In 2000, a total of 167 issuers defaulted on $49.1 billion of debt, Moody's said.
Last year, 140 issuers defaulted on $7.6 billion in muni bonds; during 2007, there were only $226 million in defaults.
The previous record was 117 issuers defaulting on $42.3 billion of debt, set for all of 2000, the agency said.
For instance, one default or multiple issuers' defaults will trigger the credit event, or a set of assets is used to determine the credit event or other extreme events.
The default rate on speculative corporate bonds has been steadily declining; according to Standard & Poor's, only 7% of issuers defaulted in the past 12 months, down from almost 10% in the year to November.
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