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Glossary

Guaranteed bond

Category — Bond Types
Guaranteed bond is a bond that is warranted by another entity. If the bond issuer defaults on the issued bonds due to business closure or financial insolvency, this legal entity makes payments on the bonds. As a reward for guaranteeing bonds, a certain commission is paid, the amount of which depends on the rating and financial condition of the issuer, but usually varies from 1% to 5% of the issue amount.

The positive side of the issue of guaranteed bonds is their higher degree of protection for investors. It should be mentioned that such bonds have great attractiveness for investors, which, in their turn, has a positive effect on the ability to raise funds at a lower interest rate.

The positive side for the issuer is the ability to attract financing using a guarantee from another company, which is especially important for smaller companies, whose fortunes do not allow them to attract financing at an acceptable rate for themselves.

The negative side for investors is usually the lower interest rate on guaranteed bonds compared to non-guaranteed bonds.

For the issuer, the negative side is higher issuance costs and a longer period for issuance of a bond, often the guarantor conducts an audit of the issuer’s financial condition.

Usually the guarantor is a bank, parent or subsidiary company, a joint venture, a specialized fund, sometimes an insurance company, in the case of a bond issue, the quasi-sovereign guarantor can be a state or a government agency. So in Canada, the government becomes the guarantor for the issues of bonds of the so-called "crown corporations" and bears the obligation to pay interest and principal.

In the UK, the term “guaranteed bonds” often refers to bonds with a fixed interest rate and does not imply any guarantee by another entity.
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