Financial Guarantee

What is a 'Financial Guarantee'

An non-cancellable indemnity bond that is backed by an insurer in order to guarantee investors that principal and interest payments will be made. Many insurance companies specialize in financial guarantees and similar products that are used by debt issuers as a way of attracting investors. The guarantee provides investors with an additional level of comfort that the investment will be repaid in the event that the securities issuer would not be able to fulfill the contractual obligation to make timely payments. It also lowers the cost of financing for issuers because the guarantee typically earns the security a higher credit rating and therefore lower interest rates.

BREAKING DOWN 'Financial Guarantee'

Most bonds are insured by a financial guaranty firm (also referred to as a monoline insurer) against default. The global financial crisis of 2008-09 hit financial guarantee firms particularly hard. It left numerous financial guarantors with billions of dollars of obligations to repay on mortgage-related securities that defaulted and it caused firms to have their credit ratings slashed.

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RELATED FAQS
  1. How does a company obtain a bank guarantee?

    Find out how bank guarantees work, why they are issued and the process that a business normally goes through to acquire one ... Read Answer >>
  2. What is the difference between a bank guarantee and a bond?

    Understand what a bank guarantee is and what a bond is, and which one is a debt instrument. Learn the differences between ... Read Answer >>
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    Learn how credit ratings help investors determine the creditworthiness of an issuer and the risk associated with making an ... Read Answer >>
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