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What Are Guaranteed Bonds?

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  • Written By: Rachel Burkot
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 October 2014
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Guaranteed bonds are types of bonds that are paid by parties other than those that issued the bonds. A bond is a debt security that represents money the issuer owes the holder. Bonds have individual terms, but in essence, they consist of principal and interest. While principal is the original amount, interest is an additional amount at a fixed rate, which serves as compensation for the borrowed amount. Interest is paid at specific times agreed upon by both the issuer and holder, and when the bond comes to maturity, the full amount of principal plus interest is due.

With guaranteed bonds, either the principal, interest or both are paid by a party other than the original issuer, borrower or debtor. Making guaranteed bonds can be a marketing strategy, and it is used by some industrial companies to strengthen credit and to boost their own financial standing. These corporations often target businesses that they have a monetary interest in and offer to make guaranteed bonds for them.

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These bonds can be risky because they are not necessarily sound investments. A guarantee bond can be difficult to ensure because the guarantor, the one who pledges that the debt will be paid, may default on the payment. A guaranteed bond should be supported with security that ensures the principal and interest can be paid. Guaranteed bonds should always come with written terms that are phrased in a way that requires the guarantor to cover the debtor’s payment, no matter what.

After guarantee bonds are issued, the terms of guarantee are outlined on the bonds and signed by the guaranteeing company. The best way to look at guaranteed bonds is an obligation of the company that issues them. Bonds that have been guaranteed differ from bonds that have been guaranteed by endorsement. Guaranteed bonds may have been guaranteed after they were issued, and the terms of guarantee are not necessarily explicitly outlined. When bonds are guaranteed by endorsement, each bond lists the fact that it is guaranteed, along with the signature of the cooperating corporation.

If the bond issuer goes into default, a guarantee will limit the repercussions for the bondholder. Every country has its own rules for dealing with the defaulting of a bond issuer. In some nations such as Canada, the federal government guarantees the bond. If the issuer defaults, the government is responsible for the total cost of the bond, including principal and interest.

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