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Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

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Updated August 5, 2020

What is a Guaranteed Bond?

A guaranteed bond is a bond whose interest and principal payments are guaranteed by a third party.

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.

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Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Guaranteed Bond, then please ask Paul.

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