What is a Joint Bond?
How Does a Joint Bond Work?
A company that wants to raise capital using bonds may choose to issue joint bonds if it generates low or fluctuating levels of revenue. The company's obligations on joint bonds are backed by at least one other party that pledges to fulfill the obligations if the issuer becomes insolvent.
Joint bonds are also called joint and several bonds, referring to the obligations that the issuer and its guarantors share together and independently. In other words, if a guarantor is called upon to make payments and refuses, that guarantor is also considered to be in default.
Guarantors for joint bonds are typically more solvent companies. For example, suppose Company ABC wishes to issue bonds to finance its expanding operations, but the market has expressed concerns about ABC's long-term ability to meet the obligations. ABC may approach Company XYZ to be a guarantor on its joint bonds. If Company XYZ agrees, it will be equally responsible for interest and principal payments on Company ABC bonds.
Why Does a Joint Bond Matter?
Joint bonds are advantageous for small subsidiary companies because they can have their parent companies serve as guarantors. Guarantor companies must ensure that they have the resources to make interest and principal payments since an inability to do so would place them in default.