A joint bond is a bond that has an issuer as well as at least two guarantors. A joint bond is also called a joint-and-several bond. The purpose of including more than two guarantors is that the shared responsibility lowers the borrowing cost, risks and the return on investment ROI. It also helps when a joint guarantor fails to fulfil the commitments of the bond or become insolvent; the other guarantor fulfils it as all the guarantors associated with the bond are equally responsible for covering the debt.
Joint bonds are usually issued to the small subsidiary companies that run under big parent companies. A parent company is the one that controls or has got a majority of interest in another company, i.e. a subsidiary company and thereby has the right to control its operations as well.
Joint bonds are issued to the subsidiary companies when they require capital support for their operational projects. The parent company acts as a guarantor and is equally responsible for repaying the debts. The parent company may help the subsidiary company if it fails to pay its debts. Because joint bonds are relatively safe investments, they provide a lower return to the investor.
A joint bond is an ideal way of generating capital through bonds for operations for such companies with unpredictable and fluctuating revenue rates. This is because if the company fails to pay its debt, it will have a backup that can assure to cover the debts.
Joint bonds are also known as joint-and-several bonds because the guarantor is equally responsible for the repayment of the debt as the issuer. However, both share the responsibility independently.
Let us understand the working principle of joint bonds with the help of an example. Suppose company A needs funding for its latest operating project and is willing to issue bonds.
However, the market analysts raise a concern about the unpredictable revenue generation of company A and question its ability to repay the principal and interest. Company A may propose company B to be a guarantor on its joint bond in such a situation. If company B agrees upon the proposal of company A, then company B becomes equally liable to pay for the interest and principal as much as company A.
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Joint bonds are helpful for the subsidiary company when it cannot repay the interest and principal to its bondholders. In such situations, the parent company can join hands with the subsidiary company and help it to repay the bondholder with the principal and interest. Therefore, it can be rightly said that a joint bond enables a subsidiary company to get monetary support from bonds even if it cannot repay the interest and principal to the bondholder.
Even investors could initially hesitate to invest in issuing bonds to a subsidiary company knowing about its fluctuating revenue. However, if a parent company gets involved in the bond as a guarantor, it gives assurance and safety to the investor for investing in a small company.
Moreover, the practice of joint bonds enables the parent company to pay the interest and principal to the bondholders on behalf of the subsidiary company. Thus, it rightly diminishes the chances of default for the subsidiary company and the risk on the investor's part.
Other than joint bonds being utilised by the subsidiary and parent companies, it is also used by friends, siblings and unmarried couples to buy the property or invest in the real estate market together.
Joint bonds could be the best way to buy properties at a young age and share the responsibility of the interest and principal payment among your friends or siblings in case one suffer from financial instability. Thus joint bond allows them to buy property even during a stage of financial instability.
Upon agreeing to the joint bond, the partners or individuals involved with the bond accept their responsibility towards the repayment of the interest, principal, tax, legal fees and administrative expenses involved with the bond. While issuing the joint bond, the bank will investigate and verify the financial status of the guarantors but would not assess the individual financial status of the guarantors.
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Even if one of the partners associated with the bond fails to repay the bond, the other partner is equally liable to repay the bond. Once the bond gets entirely paid by guarantors, they legally become the owners of the property.
Banks have become more receptive now to the acceptance of joint bonds, as it decreases the risk of default in the event of joint bonds.
Banks are extremely cooperative in approving joint bonds, which can help individuals move into better houses and improve their lifestyles. When it comes to repaying the bond, the partners can team up and share the responsibility among themselves. It saves an individual from the burden of repaying a bond all by himself.
Here is a list of things that one must consider before signing a joint bond:
The first thing to keep in mind before signing a joint bond is that all the guarantors are equally liable to the bond. If one fails to repay the bond, then the other must fulfil his responsibilities.
The second most important thing to keep in mind is that all the partners or guarantors become co-owners of the property purchased through the bond when the bond is paid off. Therefore, one must choose its partner wisely.