Credit Enhancement

Credit enhancement refers to strategies or measures used to improve the creditworthiness of a borrower or a financial instrument, such as bonds, to reduce the risk for investors. Common forms of credit enhancement include collateral, third-party guarantees, insurance, and over-collateralization. These measures are used to lower the perceived risk of default, allowing issuers to secure better interest rates and attract more investors.

Example

A company issuing bonds might use credit enhancement by purchasing insurance from a third party, ensuring that bondholders will be repaid even if the company defaults.