What Is a Joint Bond?
Let me explain what a joint bond is: it's a bond sold with a guarantee from at least two parties for the payment of principal and interest. If the issuer defaults, you as a bondholder can claim repayment from any or all of the guarantors involved. This setup lowers your risk as an investor, but it also means you'll typically get a lower return on your investment.
Key Takeaways
- A joint bond, or joint-and-several bond, is guaranteed by at least two parties.
- It's like having a co-signer on a loan—the second party steps in if the issuer defaults.
- These bonds are often used when a subsidiary needs backing from its parent company to secure financing.
- Joint bonds are relatively safe, so they provide a more modest return to investors.
- Many economists suggest the European Union should issue joint bonds to bolster the euro.
Understanding Joint Bonds
You'll see joint bonds most often when a parent company guarantees the debt of its subsidiary. Think of it as a parent co-signing a car loan for their child. Parent companies are usually larger entities holding majority stakes in smaller subsidiaries within the same or related industries.
If a subsidiary wants to raise funds for a project, it might struggle alone or face high interest rates. Investors could be hesitant about a subsidiary's bond, especially if its credit rating isn't as strong as the parent's. That's when the parent steps in as an additional guarantor.
Fast Fact
Just so you know, a joint bond is also called a joint-and-several bond.
Federal Home Loan Joint Bonds
Another clear example comes from the Federal Home Loan Bank System (FHLB), established by Congress in 1932 to finance community banking. The FHLB Office of Finance issues joint bonds to fund the 11 regional Federal Home Loan Banks.
This money then goes to local institutions for lending to home buyers, farmers, and small business owners. The system's joint-and-several liability structure sets it apart from other housing-related government-sponsored enterprises and supports the nation's small business and home mortgage financing.
Lessons From Greece
Economists often argue that the European Union should issue joint bonds to strengthen the euro. They reference the 2008-2009 crisis aftermath, particularly Greece's situation in 2014, when it was stuck in recession and couldn't use independent currency measures because of the euro.
Advocates said Greece needed backing from stronger eurozone members to pay its bills until growth returned. Ideas for European joint bonds, or common bonds, keep coming up—the latest being the European Safe Bond proposed in 2018 by a committee led by Irish central bank governor Philip Lane.
European banks and some governments might support this for the supply of safe debt, but Germany has blocked past proposals, concerned it would lead to fiscal irresponsibility in poorer eurozone nations.
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