What is Guaranteed Bond?

A guaranteed bond is a bond that is guaranteed by a party other than the issuer. One has to differentiate here between company bonds and parastatal (public enterprise) bonds. The companies with weak ratings or no credit ratings issue guaranteed bonds.

The company that issues the guarantee is usually an insurance company that has a high credit rating. It will be apparent that the investor in this case is not concerned about the financial standing of the issuer. Because the credit rating of the insurer is substituted for the rating of the issuer, the investor will look to the insurer for comfort. A weak company will only issue bonds with guarantees if the insurance premium is less than the interest premium the company would pay in the absence of the guarantee.

In many countries, the central government guarantees the bonds of the parastatals. These bonds trade at only small premiums to central government bonds, mainly because they are not as liquid as central government bond.