What is a Guaranteed Bond?
How Does a Guaranteed Bond Work?
An entity that issues a guaranteed bond has solicited a third party (usually a bank, insurance company or another corporation) that agrees to pay the interest and principal payments on the bond should they, the issuer, be unable to make such payments. In exchange for guaranteeing the bond, the third-party guarantor receives a fee.
To illustrate, suppose City XYZ issues guaranteed municipal bonds. Company ABC guarantees the bonds in exchange for a $100,000 fee. If City XYZ is ever unable to make principal and interest payments to the bond holders, Company ABC will be responsible for making the payments.
Why Does a Guaranteed Bond Matter?
Guaranteed bonds are mutually beneficial to the issuers and the guarantors. Issuers can often get a lower interest rate on debt if there is a third-party guarantor. And the third-party guarantor receives a fee for incurring the risk that comes with guaranteeing another entity's debt.
During the recent financial crisis, the U.S. government guaranteed many different types of debt in order to get credit flowing again.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Question: I want to buy a house in five years, but I won't have quite enough for a 20% down payment by that time. What if I invested in stocks to make...Read More →
In today’s world, it feels like everyone struggles with credit card debt. Because of market uncertainty and constantly changing job market, credit card debt may feel more insurmountable than ever...Read More →