Guaranteed Bond
Candlefocus EditorGuaranteed bonds offer investors the security that their investments are safe. As the guarantor will make the interest and principal payments if the issuer defaults, investors will not lose money, and can often be assured of a rate of return that is slightly higher than the rate they’d get from simply putting their money in the bank. This can make investing in guaranteed bonds an attractive option for those who want to make a sound, low risk investment.
The downside of guaranteed bonds is that these bonds tend to pay interest rates that are lower than their non-guaranteed counterparts. This is due to the added security, that the issuer is willing to pay a fee to the guarantor to provide. Additionally, the process of obtaining guaranteed bonds can be time consuming and expensive, as the issuer often has to pay the guarantor a fee and may be required to submit to a financial audit.
Despite the drawbacks and extra costs, guaranteed bonds can often be the only way for many entities to raise capital. As the fees required to secure a guaranteed bond are often lower than what an issuer would have to pay for other forms of financing, the bond can be the best option for something like a large-scale urban renewal project.
In conclusion, guaranteed bonds are debt securities that offer investors a greater degree of security and peace of mind than their non-guaranteed counterparts. These bonds are especially attractive to investors seeking a low-risk investment, although they tend to pay less in interest than non-guaranteed instruments. For an issuer, securing a guaranteed bond may be more time consuming and costly in the short-term, but can provide much needed access to capital that could not be gained elsewhere.