At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
Also known as a financial guarantee bond, the guarantee bond is a bond issue that is configured to pay a minimum amount of return, regardless of the performance of the principal. While investors do have this commitment to receive something back from the investment, the minimum is normally well below the return that would be generated if the principal did perform according to expectations. Looking closely at the bond structure and the underwriting fund for the bond is important, since these types of bonds may be underwritten.
A guarantee bond looks very much like any other bond issue, in that the investor is anticipated to earn something above and beyond the original investment. What is different is the guarantee affirms there will be some amount of return, even if the project that the bond is funding does not come to fruition. This type of guarantee can be very comforting to investors who are conservative with their investment activities, since even in the worst case scenario, they will earn at least a small return.
There are several different types of bonds that may be written as guarantee bonds. It is not unusual for tax bonds to be written in this manner. In some cases, bonds that have to do with government operated healthcare programs may utilize the guarantee bond strategy when creating bond issues. In some areas of the globe, municipalities may also issue guarantee bonds as a means of generating revenue for building construction, street improvements or any other type of similar community improvement project.
While there are many examples of guarantee bonds that do have an equitable amount of underwriting, others are purposefully underwritten. When this is the case, the potential for the guarantee bond to perform to expectations is somewhat minimized. It is still possible for the investor to earn the anticipated return, but it is much more likely that what he or she will ultimately receive is a figure closer to that guaranteed minimum return.
When considering the purchase of a guarantee bond, savvy investors will play close attention to the amount of guaranteed return, and determine if that amount is sufficient to warrant the purchase. At the same time, verifying the underwriting is also a good idea. Doing so helps to set reasonable expectations on the part of the investor, and make it much easier to determine if the investment is worth the time and money invested, or if the investor should look for a different investment opportunity