DEFINITION of 'Guaranteed Bond'

A debt security that offers a secondary guarantee that interest and principal payment will be made by a third party, should the issuer default due to reasons such as insolvency or bankruptcy. A guaranteed bond can be municipal or corporate, backed by a bond insurer, a fund or group entity, or a government authority.

BREAKING DOWN 'Guaranteed Bond'

Bonds have an inherent risk of default that could mean a bondholder never gets the principal back upon maturity and loses out on periodic interest payments. A guaranteed bond removes this risk by creating a back-up payer in the event that the issuer is unable to fulfill its obligation. Because of this lowered risk, guaranteed bonds generally have a lower interest rate than non-guaranteed bonds.

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