The insurance provides timely payment to bondholders if the issuer defaults.
The difference between the issue price and par is treated as tax-exempt income rather than a capital gain if the bonds are held to maturity. Market prices of zero coupon bonds tend to be more volatile than bonds which pay interest regularly. This applies to a bond issued at a dollar price less than par, which qualifies for special treatment under federal tax law. The insurance provides timely payment to bondholders if the issuer defaults. If interest rates rise, bond prices will decline, despite the lack of change in both the coupon and maturity.