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Guaranteed Bonds

Guaranteed bonds are bonds backed by a company other than the issuer. Frequently, in America, the guarantor is the parent company of the corporation issuing the bonds. But this arrangement can exist in any number of ways, both in this country and abroad.

Canadian "crown corporations," for example, are private corporations guaranteed financial backing by the federal government. If the issuer defaults or suffers bankruptcy, the Canadian government assumes responsibility for the outstanding guaranteed debt.

It is unusual for the US federal government to back guaranteed bonds issued by private corporations, but there are a few exceptions to this rule.

In the United Kingdom, the term "guaranteed bond" usually refers to fixed-rate bonds. So in the UK it is the bond's interest rate that is guaranteed, rather than the principal and interest payments as we have it here in North America.

The most important factor in a bond's safety is usually the financial security of the issuer. Even the most secure bonds, like closed indenture mortgage bonds, are shaky investments if the issuer is a small, young company. Guaranteed bonds are a way around this. Small corporations having difficulty financing debt backed by their own credit can use the credit of a parent corporation, insurance company, or investment bank to secure a much less risky bond issue.

Guaranteed bonds enjoy the security not only of the issuer, but also of the backing company, and are considered very safe investments, with relatively low interest rates to off-set this advantage.

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