What Is a Joint Bond?
A joint bond is offered with a guarantee of the repayment of principal and interest by at least two separate entities. In the event of a default by the bond issuer, bondholders possess the right to seek repayment from any or all of the associated institutions, corporations, or individuals. This collective responsibility reduces risk for investors, although it typically results in a lower investment return.
Key Takeaways
- A joint bond, often known as a joint-and-several bond, is underpinned by at least two guarantors.
- Similar to a co-signed loan, the additional party ensures payment if the primary issuer fails.
- These bonds are commonly utilized when a subsidiary requires the backing of a parent company to secure funding.
- Given their secure nature, joint bonds usually yield modest returns for investors.
- There have been discussions among economists about the European Union issuing joint bonds to bolster the euro currency.
Embrace the Dynamics of Joint Bonds
The Role of Parent Companies
A primary scenario involving joint bonds arises when a corporate parent company guarantees the obligations of a subsidiary. Picture this akin to a parent’s involvement in co-signing a car loan for their child. Parent companies are typically significant firms owning majority stakes in one or several smaller subsidiaries operating in the same or complementary industries.
When a subsidiary endeavors to raise funds for a capital project, it might face prohibitive interest rates or find it impossible to do so independently. Debt investors may exhibit hesitance towards bonds issued by subsidiaries, especially those lacking the same high credit rating as their parent companies. The parent company can then step in as an additional guarantor on the debt issuance, thereby enhancing credibility and reducing perceived risk.
The Federal Home Loan Joint Bonds: An Institutional Example
A prominent issuer in the joint bonds landscape is the Federal Home Loan Bank System (FHLB). Established by Congress in 1932, this system aims to sustain the community banking sector.
The FHLB’s Office of Finance issues joint bond securities to financially support its 11 Federal Home Loan Banks distributed across various regions. This funding flows to local financial institutions, assisting in lending to home buyers, farmers, and small business owners, facilitating grassroots economic stability.
The Federal Home Loan Bank’s distinctive joint-and-several liability framework sets it apart among housing-related government-sponsored enterprises and fortifies its cornerstone role in America’s small business and home mortgage finance sectors.
Learning from Economic Crises: The European Perspective
Notably, many economists advocate the idea of the European Union issuing joint bonds to enhance the euro’s stability. The post-2008 economic crisis scenario underscores the rationale behind such bonds.
For instance, in 2014, Greece, engulfed in recession, lacked the autonomy to employ currency stimulus measures due to its adoption of the euro. Proponents of joint bonds in such cases argue that Greece’s economic woes necessitated backing and credit from eurozone peers to manage its financial obligations until it regained growth momentum.
While proposals for a collective European bond, often termed a European common bond, surface periodically, a recent notable iteration, the European Safe Bond, emerged in 2018, spearheaded by a committee led by Irish central bank governor Philip Lane.
European banks and several governments within the eurozone may view such proposals favorably, realizing the demand for secure government debt. Nevertheless, Germany has consistently opposed these proposals, wary that joint bonds could incentivize fiscal recklessness among the financially weaker eurozone nations.
Related Terms: Co-signer, Debt, Investment, Parent Company, Subsidiary, Return on Investment.
References
- U.S. Government Publishing Office, Govinfo. “Oversight of the Federal Home Loan Bank System”.
- Federal Housing Finance Agency. “The Federal Home Loan Bank System”.
- Peterson Institute for International Economics. “Proposals for a Common Euro Area Safe Asset”.
