Guaranteed bonds

Generally speaking, you’ll want to avoid the word “guarantee” in finance. There are no guarantees when it comes to investing. However, guaranteed bonds do exist. To understand these, we’ll first need to discuss the idea of a subsidiary.

When companies grow, they tend to become compartmentalized. For example, Crest Toothpaste, Head & Shoulders, and Pampers are subsidiaries of Procter & Gamble. In fact, many of the products under your kitchen sink are created by companies owned by Procter & Gamble. A subsidiary is a company owned and controlled by a larger, “parent” company.

When a subsidiary of a larger company issues a bond, it can obtain a “co-signer” with its parent company. If the subsidiary cannot repay the borrowed funds, the parent company becomes responsible for doing so. For example, if Pampers issues a guaranteed bond, Procter & Gamble will “guarantee” the bond by obligating themselves to pay off the bond if Pampers cannot.

Although guaranteed bonds come with the parent company’s backing, they are still considered unsecured bonds. Essentially, the bond’s success or failure is contingent on the parent company’s ability to pay off the bond. A bond must have collateral (a valuable asset) to be secured, and a promise to pay from another company doesn’t count as collateral.

Guaranteed bonds can also refer to bonds insured by third parties, which most commonly occurs with municipal (state and city government) bonds. For example, if the city of Denver issues a bond that is insured by Ambac (an insurance company), the bond is “guaranteed.”

Bottom line - any bond with backing from a third party (whether it’s a parent company or insurance company) is considered a guaranteed bond.