Funding agreement backed notes (FABN) are a popular tool used by institutional investors to access the fixed income market. As the name suggests, these securities are backed by funding agreements between the issuer and the investor, usually a bank or insurance company. These agreements guarantee the payment of principal and interest on the notes, making them a relatively low-risk investment option.
However, even with this level of security, investors may want to further protect their investment by purchasing FABN insurance. FABN insurance is a type of financial guarantee insurance that protects investors in the event that the issuer is unable to fulfill its obligations. This can happen if, for example, the issuer becomes insolvent.
FABN insurance policies typically cover the full amount of the investment, including principal and interest payments. The cost of the insurance premium is usually a small percentage of the investment amount, but can vary depending on the perceived creditworthiness of the issuer and other factors.
One of the key benefits of FABN insurance is that it enhances the credit profile of the investment, making it more attractive to potential buyers. This can increase demand for the securities and potentially lower the cost of capital for the issuer.
Another benefit of FABN insurance is that it provides a level of certainty and predictability for investors. Knowing that their investment is backed by insurance can provide peace of mind and help investors make more informed decisions.
In conclusion, while funding agreement backed notes are already a relatively low-risk investment option, FABN insurance can provide an extra level of protection and enhance the credit profile of the investment. Investors should carefully consider their options and consult with a financial advisor to determine if FABN insurance is a worthwhile investment.