What is a Joint Bond?
A joint bond is sold with a guarantee of the payment of principal and interest by at least two parties. In the case of default by the issuer, the bondholders have the right to claim repayment by any and all of the issuing institutions, corporations, or individuals. This shared responsibility reduces the risk to the investor but also generally means a lower rate of return on the investment.
A joint bond, or joint-and-several bond, is a type of bond that is guaranteed by at least two parties.
Much like the co-signer of a loan, the second party guarantees payment if the issuer defaults.
Such bonds are often used when a subsidiary of a parent company needs backing to get a loan.
How Does a Joint Bond Work?
A company that wants to raise capital using bonds may choose to issue joint bonds if it generates low or fluctuating levels of revenue. The company’s obligations on joint bonds are backed by at least one other party that pledges to fulfill the obligations if the issuer becomes insolvent.
Joint bonds are also called joint and several bonds, referring to the obligations that the issuer and its guarantors share together and independently. In other words, if a guarantor is called upon to make payments and refuses, that guarantor is also considered to be in default.
Guarantors for joint bonds are typically more solvent companies. For example, suppose Company ABC wishes to issue bonds to finance its expanding operations, but the market has expressed concerns about ABC’s long-term ability to meet the obligations.
ABC may approach Company XYZ to be a guarantor on its joint bonds. If Company XYZ agrees, it will be equally responsible for interest and principal payments on Company ABC bonds.
Significance of a Joint Bond
Joint bonds are beneficial for small subsidiary companies if they lack the financial capability to pay their bondholders with interest and principal. In joint bond ownership, the subsidiary company’s larger parent company can step in to assist its subsidiary company and become a second guarantor to the bond issue in order to raise capital.
The practice is especially advantageous for subsidiary companies because they can leverage the financial resources of their parent company to make interest and principal payments to bondholders, which helps the subsidiary company minimize the chances of default.
Without the help of a parent company, investors may be reluctant to purchase bonds from a small company that does not have the financial ability to pay interest and principal. An additional guarantor of a parent company provides more stability and a sense of safety for investors because the risk of default is reduced.
Purchasing Property with a Joint Bond
Besides being used by a parent company and its smaller subsidiary business, joint bonds can also be used by unmarried couples, siblings, or friends who want to purchase property together.
Unmarried couples, siblings, or a pair of friends may prefer to be in joint bond ownership when purchasing a property to share the responsibility of payment, especially if one of the partners lacks the financial capability to purchase the property by themselves.
The bank will assess the financial capability of the partnership, not individually for each member in the partnership. By agreeing to joint bond ownership, both partners are jointly liable for taxes, bond repayments, legal fees, as well as other administrative expenses when purchasing the property.
It means that each partner is responsible for the bond repayment even if one partner defaults. After the loan is paid in full, both guarantors in the bond ownership will become the official owners of the property.