Generally speaking, it’s best to avoid the word “guarantee” in finance. Investing always involves risk, so nothing is truly guaranteed. That said, guaranteed bonds do exist. To understand what that means, you first need the idea of a subsidiary.
When companies grow, they often become organized into separate businesses under one larger company. For example, Crest Toothpaste, Head & Shoulders, and Pampers are subsidiaries of Procter & Gamble. A subsidiary is a company owned and controlled by a larger parent company.
When a subsidiary issues a bond, the parent company can agree to act like a “co-signer.” If the subsidiary can’t repay the borrowed funds, the parent company becomes responsible for paying. For example, if Pampers issues a guaranteed bond, Procter & Gamble “guarantees” the bond by obligating itself to pay the bond if Pampers can’t.
Even with the parent company’s backing, guaranteed bonds are still considered unsecured bonds. Here’s why: a bond is secured only when it’s backed by collateral (a valuable asset that can be claimed if the borrower defaults). A third party’s promise to pay - even a parent company’s promise - doesn’t count as collateral.
The term guaranteed bond can also refer to bonds insured by third parties, most commonly 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 described as “guaranteed.”
Bottom line: any bond with backing from a third party (whether it’s a parent company or an insurance company) is considered a guaranteed bond.
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