What is a guaranteed bond?

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

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.

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