Guaranteed bond
Also known as: guaranteed corporate bond
A guaranteed bond is a corporate bond whose interest and principal payments are backed by a company other than the issuer, typically a parent company guaranteeing the debt of its subsidiary. The guarantee adds a second layer of protection for bondholders.
A guaranteed bond is a debt security whose payments are promised not only by the issuing corporation but also by a third party — most commonly a parent company standing behind a subsidiary's debt. If the issuer fails to make an interest or principal payment, the guarantor is legally obligated to step in and pay bondholders.
The classic arrangement involves a smaller or newer subsidiary that would struggle to borrow cheaply on its own. By having a financially strong parent guarantee the bonds, the subsidiary can issue debt at a lower interest rate than its standalone credit would allow. The bond's credit quality effectively reflects the guarantor's financial strength, not just the issuer's.
It is important to understand what the guarantee covers: the timely payment of interest and principal. It does not guarantee the bond's market price, which still fluctuates with interest rates, or protect the investor from all forms of risk. A guaranteed bond is only as safe as its guarantor, so a weak parent company provides a weak guarantee.
Securities exams like the SIE, Series 6, Series 7, and Series 66 test guaranteed bonds within the broader family of corporate debt. Know that the guarantee comes from a third party (usually a parent company), that it makes the bond safer and lowers its yield relative to comparable non-guaranteed debt, and that guaranteed bonds are still corporate securities — not government-backed obligations.
Key takeaways
- A guaranteed bond's interest and principal payments are backed by a company other than the issuer, usually a parent company guaranteeing a subsidiary's debt.
- The guarantee raises the bond's credit quality to reflect the guarantor's strength, which typically lowers the yield the issuer must pay.
- The guarantee covers payment of interest and principal only — not the bond's market price.
- Despite the name, guaranteed bonds are corporate securities and carry the credit risk of the guarantor, not a government backing.